OREANDA-NEWS. March 30, 2015. Fitch Ratings has affirmed the Flemish Community's (Flanders) Long-term foreign and local currency Issuer Default Ratings (IDR) at 'AA', with a Negative Outlook, and its Short-term foreign currency IDR at 'F1+'. The senior unsecured ratings have also been affirmed at 'AA'/'F1+'. The commercial paper programme has been affirmed at 'F1+'.

Flemish Community's ratings are underpinned by its strong socio-economic profile, reasonable budgetary performances and sound debt coverage ratios. Over the medium term, Fitch believes that the Flemish Community has the capacity to maintain a budgetary profile that is compatible with its current ratings. The Negative Outlooks reflect those on Belgium's IDRs (AA/Negative/F1+) as Flanders' ratings are capped by the sovereign's ratings.

KEY RATING DRIVERS

Flanders is one of the wealthiest regions in Europe (with a GDP per capita at 133% of the EU27 average in 2010), due to an attractive and diversified economy. Even though its economy can be more volatile than the national economy, due to its export-oriented profile, Flanders has a structurally low unemployment rate (5% at end-2013 compared with 8.4 % at the national level) and higher GDP per capita than the country as a whole.

From 2015, Belgium's sixth state reform will see the introduction of newly devolved responsibilities combined with greater fiscal autonomy in absolute terms and, for Flanders, its contribution to the consolidation of Belgian public finances. Due to the implementation of some structural measures (EUR1.15bn), Fitch estimates Flanders' budgetary performance would remain fairly stable and sound with a current margin of 10.3% in 2017 (8.9% at end-2014).

Revenues - linked to federal taxes and indexed to GDP growth and inflation - would continue to be underpinned by the dynamism of Flanders' economy. Expenditure flexibility is limited by an indexation formula and multi-year contracts. However, a revenue shortfall could be met by expenditure cutbacks.

At end-2014, direct risk reached EUR11.8bn (of which EUR6.9bn was public-private partnerships), leading to a direct risk payback ratio (direct risk-to-current balance) of 5.3 years compared with 4.3 years in 2013 and an average duration of direct debt at 2.4 years. We expect the direct risk payback ratio to shrink to about two years in 2018, based on an expected balanced budget and an average EUR3bn of capital expenditure per year.

Fitch assesses Flanders' refinancing risk as moderate. In 2016, it will face repayment of EUR1.3bn maturing debt, corresponding to about 30% of its debt portfolio. Refinancing risk is mitigated by high debt service coverage and predictable cash flows. Access to short-term funding is strong, owing to a EUR3bn credit line with ING Belgium (A+/Negative/F1+) and a EUR1.5bn commercial paper programme.

Fitch considers the Flanders's financial management as highly efficient, notably in its forecasting ability, which allows the community to control its annual commitments in terms of budgetary performance and debt.

RATING SENSITIVITIES

A downgrade of Belgium would be reflected in Flanders's ratings. A downgrade may also stem from a consistently weak performance, combined with an increase of private-public partnership exposure, resulting in a direct risk payback ratio of more than eight years.

The ratings may be upgraded following a similar rating action on Belgium's ratings, provided budgetary performance remains in line with our expectations.