OREANDA-NEWS. Fitch Ratings has affirmed the Spanish Autonomous Community of Asturias' Long-term foreign and local currency Issuer Default Ratings (IDR) at 'BBB' with Stable Outlooks and Short-term foreign currency IDR at 'F2.'

KEY RATING DRIVERS
Asturias' ratings reflect its relatively weak operating margin and its high direct debt risk. The ratings also reflect its economy, which is similar to the national average. The Stable Outlook incorporates Fitch's base case forecast of a moderate rise in direct debt in the medium term.

Fitch expects Asturias' operating margin to remain in the 2%-4% range over 2015-2016, from an estimated operating margin of 2.4% at end-2014, according to preliminary results. Fitch believes operating expenditure will become difficult to further reduce over the medium term as Asturias cut it by a high 10% between 2009 and 2013. Asturias reported a negative current balance for a fourth consecutive year, estimated at a high EUR66m at end-2014, or negative 1.6% of current revenues (negative current balance of EUR4.4m at end-2013). The recently approved 2015 budget indicates a negative current balance of EUR49.5m, or negative 1.6% of its current revenue (negative current balance of EUR109.3m in the 2014 budget), indicating a 6.1% growth in total allocations from the central government.

There has been a large increase in direct debt since 2008 (of EUR2.2bn), which has left the region exposed to high refinancing risk (36.4% for next three years). Direct debt represented a high 101.6% of current revenues at end-2014, from 20.5% in 2008 and Fitch expects the regional direct debt to continue rising modestly until 2016 to 101%-106% of current revenue.

At end-2014, debt contracted under state mechanisms represented 34% of outstanding direct debt, an illustration of support from the central government. This includes the Regional Liquidity Fund and the Supplier's Fund. On 23 December 2014, the Ministry of Finance and Public Administration introduced further measures to ease liquidity for autonomous communities within those mechanisms, resulting in roughly EUR16.8m interest expense savings until end-2015 for Asturias, according to the Ministry of the Finance and Public Administration. For 2015, Asturias will continue taking advantage from the state funding, benefitting from the new mechanism, Financial Facility Fund, resulting in EUR19m expense savings until end-2015.

Asturias' economy has performed similar to the national average, with a GDP per capita 6% below the national average. Housing prices fell by 22%, less than in Spain (28%) and as many as 12,000 new houses are still pending sale, representing 1.9% of regional stock, in line with the national average. Household debt is much lower than the national average (deposits representing 118% of credits). Since 2009, Asturias has lost 11% of jobs versus 6% for Spain and its employment rate in 2014 (40.9%) was below the national average (45.04%), given its higher elderly population. However, this higher proportion of the elderly population relative to the national average has resulted in an increase in the number of pensions in the region, resulting in greater stability of personal income tax revenue.

RATING SENSITIVITIES
The inability to post a positive current balance in 2016 or debt increasing above Fitch's expectations could drive negative rating action.

The Outlook could be revised to Positive if the current balance improves so that it largely covers debt repayment, and if debt stabilises.