OREANDA-NEWS. March 23, 2015. Fitch Ratings has affirmed the Italian Autonomous Province of Bolzano's (PAB) Long-term foreign and local currency Issuer Default Ratings (IDR) at 'A' and its Short-term foreign currency IDR at 'F1'.The Outlook is Stable.

The affirmation reflects PAB's sound budgetary performance underpinned by its wealthy economy, as well as its nearly debt-free position.

KEY RATING DRIVERS
Institutional Framework: PAB is eligible to be rated above the sovereign by virtue of its institutional strength and high degree of financial autonomy. PAB's special autonomous status entitles it to receive fixed regional shares of major national taxes, underpinning the province's tax revenue resilience and limiting dependence on state transfers, while a diversified set of responsibilities support its budgetary flexibility.

Contributions to the national consolidation efforts are subject to bilateral agreements and will account for about EUR500m from 2019 to 2023, or about 0.5% of Italy's interest burden. The leeway of a maximum two notches above the 'BBB+' sovereign rating reflects the risk of weakening predictability of intergovernmental relations and captures possible interferences by the state in case macroeconomic stress and/or stressed sovereign finances. Subsequently, Fitch considers Italian inter-governmental relations as "Neutral" for Bolzano.

Fiscal Performance: Provincial revenue is centred on fixed shares of national taxes raised in the province, contributing to about EUR1bn of fiscal leeway in terms of revenue raising and spending curtailment potential. Fitch expects current revenue to edge towards EUR5bn over the medium term from an average EUR4.5m in 2011-2013, on the back of growing tax base and the VAT share rising to 80% in 2015 from 70%. PAB's operating expenditure, which is primarily made up of spending on healthcare, social services and education, is expected to grow to around EUR3.4bn, mainly due to about EUR150m in 2015 and 2016 overall of new responsibilities delegated by the Region Trentino Alto Adige, such as administrative and organisational support to the judiciary.

Debt: PAB's market debt accounts for about EUR40m at end-2014, and Fitch expects it to be fully repaid by 2016. Outstanding direct debt liabilities will be limited to a EUR150m non-interest bearing loan from Region Trentino Alto Adige, which PAB will repay from 2017. When including tax-supported debt of its companies and municipalities, Fitch expects PAB's overall liabilities to remain around EUR1bn over the medium term, or 25% of current revenue.

Economy: PAB benefits from wealthy socio-economic indicators with a per-capita GDP 45% above the EU average and a low unemployment rate, close to 5%, well below the national average of 12.7% in 2014. While construction remains weak, the 2% growth in industry and 3% growth in tourism drove a rise in GDP of about 0.5%. Fitch expects the sectors to contribute to rise in GDP of 1% in 2015, underpinning PAB's tax revenue.

Management: Investments kept at around 30% of total spending and tax breaks for households and businesses are aimed at strengthening internal demand and economic activities. On the back of rising revenues, Fitch expects PAB's free reserves to have remained at about 5% of the budget. With per capita health care spending 20% above the national average, PAB aims to maintain high standards of services, as well as supporting the local economy. Fitch deems PAB's management prudent and conservative, with actuals usually better than budget data.

RATING SENSITIVITIES
PAB's IDRs move in parallel with those of Italy due to its standalone profile being constrained by the sovereign's ratings. A rating action on the Republic of Italy would translate into a corresponding rating action on PAB.

A decline in the operating margin towards 10%-15%, due to a looser grip on spending and/or a fall in revenue, or a growth in direct and indirect debt liabilities beyond expectations could lead to a downgrade.