OREANDA-NEWS. Fitch Ratings has affirmed the Italian Region of Calabria's Long-term foreign and local currency Issuer Default Ratings (IDRs) at 'BBB' and Short-term foreign currency IDR at 'F2'. The Outlooks are Stable.

The affirmation reflects low debt amid expectations of protracted weak operating margin as Calabria's taxes are weakened by the prolonged economic recession although overall revenue remain supported by the equalisation system.

KEY RATING DRIVERS
Fiscal Performance: Calabria continues to exhibit weak operating performance with preliminary indications pointing to a current margin of about 1% in 2014, alongside Fitch's 2013-2015 projections, versus a 2013 deficit of 1% on Fitch's calculation basis. Fitch expects Calabria's health care sector, which accounts for 80% of the operating budget, to remain balanced as cost streamlining offsets cuts in national subsidies.

Debt and Liquidity: Debt stands at about EUR1.25bn and Fitch expects it to remain below EUR1.5bn in the medium term, or one-third of the current revenue. Liquidity remains strong although cash declined to EUR750m in December 2014 from EUR1.2bn in 2013 as the region accelerated the repayment of liabilities pre-dating 2011 which shrank to about EUR300m according to Calabria's preliminary indications, down from EUR1.1bn in mid-2014.

Management: Calabria is one of few Italian regions with a budgetary policy targeting for free reserves, which account for about 5% of operating revenues on Fitch's calculation basis. Banking on the partial relaxation of the spending rules by the national government the newly elected administration plans to speed up investments funded with earmarked revenue, of up to EUR4bn or nearly one year of regional income, so to contribute re-igniting economic growth.

Economy: Calabria's economy may have shrunk by about 1% in 2014 according to Fitch's preliminary estimate, marking the seventh consecutive year of contraction. While a large informal economy mitigates the impact of economic weakness, a modest pick-up in the number of new firms and growing tourism flows point to a modest GDP recovery in 2015 albeit without a major boost to employment. With the unemployment rate hovering around 20%, Fitch expects limited or no contribution of the economy to Calabria's direct tax growth.

Institutional Framework: Fitch assesses Italian inter-governmental relations as "Neutral" for Calabria's ratings. Subnationals with weaker economic bases receive subsidies to ensure services are provided with national standards but remain subject to curtailment of resources within the national consolidation efforts. Weak enforcement of the prudential regulation aimed at preserving fiscal balance largely offsets the predictability offered by revenue equalisation and, at times, leads to off-balance sheet liabilities. Legislation allows the repayment of financial debt in priority versus commercial liabilities in case of liquidity stress while the national government steps in when a subnational finds itself unable to deliver basic services or meet financial commitments. Financial debt is excluded from proportional settlement, underscoring protection for financial lenders and bond-holders.

RATING SENSITIVITIES
Failure to return to operating surplus on a sustainable basis could result in negative rating action. A significant economic recovery halving the unemployment rate combined with an improvement of the region's operating margin towards 5% could lead to positive rating action.