OREANDA-NEWS. April 13, 2015. Fitch Ratings has affirmed the Historical Territory of Gipuzkoa's Long-term foreign and local currency Issuer Default Ratings (IDRs) at 'A' with Stable Outlooks. Fitch has also affirmed the Short-term foreign currency IDR at 'F1.

KEY RATING DRIVERS
The affirmation reflects the application of Fitch's criteria explaining the conditions of eligibility for a subnational to be rated above the sovereign. Fitch considers that local and regional governments within the Basque Country meet these conditions (institutional strength, financial autonomy and willingness to service debt). Gipuzkoa is in charge of levying, collecting and inspecting most of the tax revenue generated within its boundaries. The Stable Outlook reflects that on Spain (BBB+/Stable).

The affirmation also reflects Gipuzkoa's solid socio-economic profile, its ability to maintain a stable operating performance, and its smooth debt repayment schedule. The ratings also takes into account its prudent management and transparent financial reporting.

Gipuzkoa recorded a positive current balance over the past five years, with operating margins hovering around 2%-4%, and we expect them to remain around 3% over the next two years. If institutional transfers were deducted from current revenues, the current margin would have been about 18.8% in 2013.

According to preliminary results, tax collection grew by 5.8% in 2014, including a slight rise in the wealth tax. We expect taxes to keep growing at a healthy pace over 2015-2016 as a result of the economic prospects and the active campaigns against tax fraud. In 2013, Gipuzkoa recorded a surplus before net financing of EUR2m, lower than the EUR38m in 2012, mainly due to the administration's commitment to maintaining some investment to tackle the economic deceleration.

Although direct debt increased over 2008-2011 and again in 2013, we expect it to remain stable at EUR0.5bn until end-2016. Gipuzkoa's operating balance was more than two times its debt servicing in 2013 and Fitch expects this to remain stable. Direct debt over current balance remained at 3.9 years in 2013 and Fitch expects it to remain below 4.5 years until end-2016. Debt amortisation reached a peak of EUR90m in 2014 and will decline over the coming years, as a low debt-contraction policy is expected.

Gipuzkoa is a wealthy province by national and international standards and its GDP per capita was estimated in 2012 at 35% above the Spanish average, which was EUR22,562, making it Spain's third-wealthiest province. It has an estimated population of 715,000, about 1.5% of the national total, whereas it produces around 2% of the national GDP. In common with northern Spain, around 20.6% of its population is aged over 65, burdening social services costs. The labour market is recovering after the crisis years and the number of registered workers grew 1.3% in 2014, although this was below the national rate of 2.4%, probably due to a much lower unemployment rate than the national average (14.3% versus 24.4%). Accordingly, the expected collection personal income tax grew by 2.4% in 2014.

RATING SENSITIVITIES
An upgrade of the sovereign would be a condition for positive rating action, since Gipuzkoa is already two notches above the rating of Spain, the maximum allowed under Fitch's criteria.

The ratings could be downgraded if Gipuzkoa's operating balance falls and does not fully cover annual debt service requirements. A downgrade of Spain would trigger a downgrade of Gipuzkoa.