OREANDA-NEWS. Fitch Ratings has affirmed the Autonomous Region of Friuli Venezia Giulia's (FVG) Long-term foreign and local currency Issuer Default Ratings (IDR) at 'A' with Stable Outlooks and Short-term foreign currency IDR at 'F1'. The issue ratings on FVG's senior unsecured bonds have also been affirmed at 'A'.

The affirmation reflects FGV's demonstrated ability to maintain a solid operating performance coupled with low debt. The Stable Outlook reflects Fitch's expectation that the region will maintain a solid and resilient operating surplus over 10% of revenue in 2016-2017 enhanced by statutory provisions, amid decreasing financial debt. The Short-term 'F1' rating is based on the large cash reserves the region has accumulated, which were in excess of EUR2bn at the end of 2015.

KEY RATING DRIVERS
Neutral Institutional Framework
FVG is eligible to be rated above the sovereign by virtue of its institutional strength and high degree of financial autonomy. FVG's special autonomous status entitles it to receive fixed shares of major national taxes collected in its own territory, ranging from 91% of VAT to 45% of corporate income tax, underpinning the region's tax revenue resilience and limiting dependence on state transfers. A diversified set of responsibilities supports its budgetary flexibility combined with modifiable taxes, which account for nearly 14% of total revenues.

FVG's contribution to national consolidation efforts is subject to bilateral agreements, which currently rule a EUR750m-EUR800m annuity during the validity of the pact (2014-2018) and decreased from the EUR1bn contribution in 2013. However, FVG's rating differential above the 'BBB+' sovereign rating reflects the very low risk of interference by the state in case of macroeconomic stress and/or heightened pressure on sovereign finances. Subsequently, Fitch considers Italian inter-governmental relations as "Neutral" for FVG.

Sound Fiscal Performance
Based on preliminary data, FVG's 2015 strong performance is on track for a double digit operating margin in excess of 14%, benefiting from the delayed impact of lower corporate taxes that should materialise in 2016 and higher transfers to compensate for out-of-region patients attracted by FVG's healthcare system. Fitch expects FVG's medium-term performance to return in line with its historical average in the 10%-12% range under the assumption of continuous costs controls on the healthcare sector, which absorbs 50% of revenues, as well as a close grip on transfers to local authorities and public transport, which are expected to hover at around EUR700m.

Moderate Debt, Sound Liquidity
Direct debt of EUR485m or less than 10% of the current revenue (when excluding debt served by the state) is a strong key rating factor and very low for FVG's budget size . It is the result of a conservative self-funding policy, which targeted stock reduction from EUR1.3bn at FY10 to less than EUR400m by the end of 2016. Guarantees issued to the regional companies are expected to grow from EUR456m in 2015 to support regional investment in an effort to stimulate the local economy. Fitch estimates direct and indirect risk will hover around EUR1.2bn in 2017, or 20% of operating revenue, which is still low compared with international peers. The relaxation of spending rules to fund capital spending within the agreement with the national government may reduce liquidity towards EUR1bn by 2017 from an average EUR2bn in 2011-2014.

Prudent Management and Administration
Fitch considers FVG's management as a strength given tested reliable and prudent budgeting, with forecasts regularly in line with actuals. Undrawn loans for about 10% of revenues underpin FVG's fund balance surplus and cushion against any unforeseen spending needs. Fitch expects FVG to strengthen investment spending to up to EUR1bn by 2018 from helping revamp the regional economy while maintaining a budget close to balance.

Resilient Economy
With a population of 1.2 million and EUR35bn GDP, FVG's economic robustness is mirrored in a GDP per head in line with national average and unemployment below the national level (8.0% in 2015 versus Italy's 12.0%). Fitch foresees FVG on track for economic recovery after slower economic gains following the last recession. Growing exports, improved domestic demand coupled with revived public and private spending, will drive 2016 GDP to mimic national data, expected at around 1.3%. Strong internationalisation and the pivotal role played by the insurance and shipbuilding sectors leave the regional economy vulnerable to exogenous economic shocks.

RATING SENSITIVITIES
FVG's IDR is two notches above sovereign, highlighting its strong intrinsic credit profile. An improvement of the latter with an operating margin increasing towards 20% amid low debt and easing risks of national macro-economic could lead to an upgrade. The rating could come under downward pressure upon a downgrade of Italy's sovereign rating or a weaker intrinsic credit profile, such as a sustained departure from Fitch's expectation of 10% operating margin in the medium term combined with direct and indirect debt in excess of 50% of total revenues.