OREANDA-NEWS. Fitch Ratings has affirmed the Autonomous Community of Andalusia's Long-term foreign and local currency Issuer Default Ratings (IDR) at 'BBB-' with Stable Outlooks. Fitch has also affirmed the Short-term foreign currency IDR at 'F3'. The 'BBB-' ratings on Andalusia's outstanding senior unsecured bond issues have also been affirmed.

KEY RATING DRIVERS
The ratings are supported by the 'BBB-' rating floor for Spanish autonomous communities. The rating floor is based on a number of supporting factors that contribute to improving a region's liquidity and reducing the likelihood of default. These include the budgetary stability law and the recent law controlling commercial debt; the absolute priority of debt servicing by law as per article 135 of the Spanish Constitution; and the access to state support mechanisms such as the Regional Liquidity Fund (FLA) and the Financial Facility Fund (FFF).

In Fitch's view, access to the state support mechanisms will continue to ensure timely debt servicing for Andalusia. At end-2014, the region had received a total of EUR16.4bn from state support funds, an illustration of strong support from the central government. On 26 December 2014 the Ministry of Finance and Public Administration introduced the Royal Decree Law 17/2014 to enhance the financial state support to the Spanish regions in place since 2012, by introducing a new instrument - the FFF - for regions that are compliant with the stability goals; and another to fund the regional governments' social service provision (see "Fitch: State Support for Spanish Regions Reinforced and Extended", dated 13 April 2015 on www.fitchratings.com).

Andalusia's ratings reflect the region's weak but improving operating performance, an increasing debt burden and a weaker economic profile than Spain, with a GDP per capita equivalent to 74% of the national average. The ratings also reflect the region's challenge to achieve a positive current balance until 2016, and a likely increase in debt over this period. They also factor in Andalusia's commitment to comply with fiscal targets, as evident in a fiscal deficit of 1.16% for 2014, close to the 1% goal.

Andalusia's standalone credit metrics are weaker than its ratings indicate due to its negative operating and current balances reported since 2011. It reported a negative operating balance of EUR414m in 2014, an improvement from a negative EUR695m in 2013, but still insufficient to stabilise its accounts. Economic recovery translated into a tax collection increase of 2% in 2014, a trend we expect to continue over the next two years. Coupled with a moderate increase in operating expenditure and interest savings due to the state support mechanisms, we expect the region to post a positive operating balance over 2015-2016. The ability to meet the fiscal deficit goal for 2015 of 0.7% will depend on capex containment, as was the case in 2014.

Andalusia will receive a total of EUR3bn in 2015 from the FFF, expected to cover its borrowing needs for the year, and an additional EUR80m from the Social Fund. Debt contracted under both instruments carry zero interest in 2015, and additionally the FFF funds will not incur interest expenses until 2018. Andalusia is eligible to receive FFF funds as it met its fiscal deficit goal in 2013.
In 2014, direct debt rose more than 20% to EUR27.9bn. Fitch estimates that Andalusia's debt could increase to over EUR30bn by 2016 or 140% of current revenues. Andalusia faces significant debt redemptions over 2015-17, but Fitch believes any refinancing risk will be mitigated by access to state support.

Regional nominal GDP grew 1.3% in 2014, and Fitch expects the figure to be above 2% over 2015-2016, in line with Spain's. One of the weakest attributes of the regional economy is high unemployment, which was 34.8% in 2014, compared with 24.4% nationally. However, in 1Q15 the labour market showed a positive reversal of trend, as total registered workers rose 1.6% against 1% for Spain.

RATING SENSITIVITIES
Fitch will review the rating floor if state support measures are cancelled or if there is a reduction in the central government's ability and willingness to continue providing support to the regions. If the floor is removed, Andalusia's rating would likely be downgraded by at least two notches, unless it is able to report a structural positive current balance.