OREANDA-NEWS. Fitch Ratings has revised the Outlook on the Italian region of Lazio to Stable from Negative and affirmed its Long-term foreign and local currency Issuer Default Ratings (IDR) at 'BBB' and Short-term foreign currency IDR at 'F3'. The affirmation affects the region's senior unsecured debt, including two bonds (XS0198341587, and XS0197857856) for an original amount of EUR300m.

The revision of the Outlook reflects Lazio's revenue-enhancing measures aimed at strengthening operating performance amid the slowly recovering economy and Fitch's expectations that Lazio's debt liabilities will remain around 1.5x of the budget size over the medium term.

KEY RATING DRIVERS
The rating actions reflect the following rating drivers and their relative weights:

HIGH
Fiscal Performance: Fitch expects Lazio's operating surplus to double to 8% of revenue in 2015-2017, surging to EUR1bn, as the region has tapped into its tax raising flexibility by increasing personal income tax (PIT) surcharges. The population recount could increase health care allocation by about 3% from 2015 making room for tax cuts on low earners and restore some tax-raising potential. Real estate asset sales and capital subsidies from the EU will fund the majority of investment, primarily in transport, health and economic development, which Fitch expects to average EUR0.75bn per annum, a low 5% of total spending.

MEDIUM
Economy: Lazio's economy remained stagnant in 2014 according to Fitch's estimates, with the unemployment rate close to 12.5%. However, the EUR9bn of arrears cleared by the region in 2013-2014 have eased local SMEs' liquidity stress and may have contributed to the 1.3% growth in the number of registered firms against a general decline in Italy. Fitch expects a mild GDP recovery of about 0.5% in 2015 and 1% in 2016 driven by commerce and tourism. A resilient and slightly growing employment base of 2.25.-2.40m workers underpins growth of regional revenue towards EUR15bn by 2017, from EUR13.5bn in 2013/2014.

The ratings also reflect the following key rating drivers:

Debt: Long-term debt rose to EUR20bn in 2014 from about EUR12bn in 2011-12 as Lazio front-loaded the restoration of the fund balance by funding past commitments with subsidised loans from the national government (EUR9bn with principal amortising due in 30 years). Market loans and bonds declined to around 15% of total debt. Fitch envisages EUR0.5bn new borrowing per year in 2016-2017 matching the principal repayment to comply with the balanced budget. Gross debt liabilities account for nearly 150% of the operating revenue, but long loan maturities have extended Lazio's average debt life to around 17 years.

Institutional framework: Fitch assesses Italian inter-governmental relations as "Neutral" for Lazio's ratings. Weak enforcement of the prudential regulation aimed at preserving fiscal balance lead, at times, to off-balance sheet liabilities, such as Lazio's fund deficit, which is being reduced from EUR6bn in 2011-2013. 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. Lazio remains under the surveillance of the national government, which monitors the implementation of the recovery plan aimed at consolidating budget balance in the health sector.

Management: Lazio is implementing a new accounting system, which could reduce receivables and payables by stripping them of pure administrative, or pro-forma, components. Fitch expects Lazio's healthcare liabilities to continue reducing towards EUR1bn by end-2015, from EUR6bn in 2013, as the stabilisation of health costs following a reduction in the number of hospitals frees up part of the revenues for health care alongside progress in the implementation of the recovery plan. Lazio aims to settle bills within 60 days from the invoice, a sizeable improvement compared with of 250 days of the past two decades.

RATING SENSITIVITIES
A weaker than expected budgetary performance with an operating balance not covering debt servicing requirements thereby resuming the need of preferential payments for timely debt servicing could lead to a downgrade.

A stronger than expected economic recovery fuelling the tax base growth and budget flexibility coupled with debt liabilities trending towards 1x of the budget size could lead to a positive rating action.