OREANDA-NEWS. March 30, 2015. Fitch Ratings has affirmed the Italian City of Rome's Long-term foreign and local currency Issuer Default Ratings (IDR) at 'BBB' and Short-term foreign currency IDR at 'F2'. The Outlook is Negative.

The affirmation reflects Fitch's view that Rome's long term direct debt will remain low at 25%-30% of the budget in 2014-2016. The Negative Outlook reflects uncertainty surrounding the efficacy of measures to overcome the city's current deficit.

KEY RATING DRIVERS

Fiscal performance: Rome posted a small operating deficit in 2014, according to preliminary figures when adjusted for difficult-to-collect revenue. We expect adjusted operating revenue to remain almost stable at EUR4.7bn in the medium term, as growth in the tax base and fees offsets cuts in national subsidies. Rome aims to divest minor municipal companies as well as streamline rents, social services (EUR130m) maintenance (EUR40m) and service contracts such as those with municipal transport companies ATAC (EUR70m) in order to overcome longstanding losses.

Institutional framework: Rome continues to benefit from ad-hoc financial support measures, for example in the form of Gestione Commissariale del Comune di Roma, which took on Rome's EUR6bn of liabilities that pre-dated 2008, and the 2014-2016 recovery plan initiated by the national government. The latter envisages a cumulated EUR0.5bn of revenue rise and spending cuts. At the same time Rome remains subject to reductions in national subsidies amid Italy's efforts to narrow its deficit and reduce debt. On balance, Fitch considers Italian inter-governmental relations as neutral to Rome's ratings.

Debt: Fitch expects Rome's direct debt to remain at around EUR1.2bn in 2015-2016, or 30% of the budget, absorbing a modest 2% of revenue for debt servicing. In Fitch view, debt is, however, set to grow over the medium-to long-term as the city prepares to host the Vatican Jubilee in 2016 and to compete to host the 2024 Olympic Games.

Management: Pending the reform of municipal services, Rome's rigid cost structure may make it difficult to implement sustained cost curtailment, with risks that the same costs will resume in the future. A new accounting system with subsequent implementation of more accurate forecasts may help strengthen the tax and fee collection rate towards 95%. While prolonged economic weakness may exacerbate Rome's difficult-to-collect revenue issue, which Fitch estimates at about EUR200m per year, the city has EUR1bn of provisions for doubtful receivables to partly offset liquidity risk (arising from revenue/spending gaps).

Economy: Rome's economy remains based on one of the most developed tertiary sectors among other Italian cities, particularly for tourism, other than commerce. This results in a GDP per capita that is 30% above the EU average. Fitch expects Rome's GDP to have contracted by about 0.5% in 2014, but to increase by 0.5% in 2015, on the back of growing tourism (up 5% in 2014). Tourism remains a key growth driver, with spending by visitors at nearly 10% of local GDP.
As the capital of Italy, a large number of public institutions, including embassies, are based in Rome, making the city's economy less sensitive to market fluctuations.
RATING SENSITIVITIES

The ratings could be downgraded if the implementation of recovery plan fails to restore the operating balance to surplus, and consequently to cover debt-service requirements.

Conversely a current surplus keeping the debt-to-current balance ratio at below 50 years could lead to the Outlook being revised to Stable.

ASSUMPTIONS

Pending more information on the cost-related impact of the Vatican Jubilee in 2015-2016, Fitch assumes no major effect on Rome's trend of operating balance.