OREANDA-NEWS. Fitch Ratings has affirmed the Italian City of Rome's Long-Term Foreign and Local Currency Issuer Default Ratings (IDR) at 'BBB' and Short-Term Foreign Currency IDR at 'F2'. The Outlook is Stable.

The affirmation reflects Rome's low direct debt and Fitch's expectations that the city will maintain a positive, but small, operating margin over the medium term, covering annual debt servicing requirement for interest and principal.

The Stable Outlook reflects Fitch's expectations that, despite it being too early to assess the potential medium-to long-term impact of the current political tension among the city's authorities, Rome's credit fundamentals will not be affected in the near future. In the event of a prolonged political crisis paralysing the administration's timely decision-making process and stalling the implementation of the city's recovery plan, Fitch may take appropriate rating action.

The Stable Outlook also reflects the continuing guarantee of timely debt servicing repayment from the preferential payments mechanism.

KEY RATING DRIVERS

Neutral Management and Administration

The last election in June 2016 of the new major with a clear majority in the municipal council should be supportive of the decision-making process in the administration but this could be challenged by recent political tension. Fitch will continue to monitor developments closely.

The new administration aims to reform municipal companies (including ATAC and AMA, transportation and waste collection, respectively), address tax evasion and increase tax and fees collection rate from the average 80% seen in 2013-2015. Fitch views management and administration as neutral to Rome.

Neutral Institutional Framework

Rome continues to benefit from ad-hoc financial support measures, including Gestione Commissariale del Comune di Roma (GC), which was created to take on Rome's liabilities pre-dating 2008 and totalling EUR6bn (which Fitch includes in the city's contingent liabilities), as well as the 2014-2016 recovery plan to address the original EUR550m operating deficit in the city's 2013 budget (or about EUR200m as recalculated by Fitch, 5% of the city's budget).

While the national government contributes to financing Rome's unexpected events or large projects, including the 2015-2016 Vatican Jubilee, the city is subject to making contributions to the national deficit and debt reduction effort. Also, it is a net contributor to the municipalities' equalisation fund (EUR370m in 2015). On balance Fitch views the institutional framework as neutral to Rome.

Narrow Fiscal Performance

Fitch expects Rome to remain committed to containing its operating expenditure growth in real terms. We also expect Rome's revenue to be on an upward trend over the medium term, supported by increasing fees on services and some minor taxes (ie tourist tax), as property and personal income tax are already at their upper legal limits. Fitch therefore expects Rome to maintain a mildly positive operating budget (after having overcome its operating deficit in 2015 according to Fitch's calculations), taking into account the annual EUR28m coverage of the EUR850m fund balance deficit, which surfaced after new accounting rules were introduced in 2015.

Low Debt, Healthy Liquidity

To partly finance the city's capital spending, Fitch forecasts direct debt to increase to EUR1.5bn over the medium term from EUR1.2bn at end-2015, or about 30% of the budget (nearly 50% when including the financial debt of main subsidiaries, which is included in the city's net indirect debt).

Fitch expects direct debt metrics to remain healthy, as debt servicing (principal and interest), representing 2% of revenue in 2015, will be covered by the current balance over the medium term, with a debt-to current balance of around 25 years. Liquidity, amounting to EUR600m at end-2015, does not represent a risk. Fitch views debt and liquidity as strong for Rome.

Potential Economic Outperformance

Fitch forecasts that the city's GDP growth in 2016 could outperform the national economy (0.8% for 2016), benefiting from Vatican Jubilee-related events and subsequently an improving tertiary sector (tourism and commercial activities). This should help increase tourist tax revenue and support wealthy economic indicators in 2016-2017. The unemployment rate should decrease in 2016 to 10% (from nearly 11% in 2015), underpinning a growing tax base and a GDP per capita at around 30% above the EU-28 average. Fitch views the economy as strong for Rome.

RATING SENSITIVITIES

A downgrade could stem from a failure to improve tax and fees collection rates, undermining confidence in the financial management of the city's accounts. Failure to improve the operating performance or increases in direct/indirect debt to levels no longer compatible with the ratings could also prompt a downgrade.

Conversely, a solid and growing economy supporting stronger fiscal performance, including overcoming the fund balance deficit, improved collection rates, and the operating margin increasing towards 10% could result in positive rating action.

KEY ASSUMPTIONS

Fitch assume that GC will continue to manage and regularly service Rome's debt and liabilities predating April 2008 until GC itself will cease operations once commercial liabilities are paid or transacted and old receivables are cashed or written off. We believe it is more likely that debt and liabilities could eventually be consolidated in the national government's accounts since GC is a state-sponsored entity.

Fitch's expectations are based on the rapid resolution of the current political tensions, so that the administration can resume management of the city's activities in an efficient and timely manner.