OREANDA-NEWS. June 10, 2015. Fitch Ratings has affirmed the Autonomous Community of Cantabria'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 'F2.'

The affirmation reflects Fitch's expectation of fiscal improvement as well as moderate debt burden, despite continued weak fiscal results, with negative current balances. The ratings also reflect Cantabria's economy, which fares similar to the national one but is expected to improve. The Stable Outlook incorporates Fitch's expectations that the regional government's operating margin will improve to the 3.0%-3.3% range and that direct debt will rise moderately until 2017.

KEY RATING DRIVERS
Weak Fiscal Result, Large Deficits
Fitch estimates direct debt will increase to around EUR2.4bn by end 2015, representing close to 128% of Cantabria's current revenue at that date, from EUR2.1bn in 2014. Economic weakness since 2009 has contributed to a sharp decline in taxation revenues resulting in large deficits that had to be financed by debt.

Expected Improvement in Operating Performance
Fitch expects Cantabria's operating margin to improve to around 3% over 2015-2016, compared with an operating margin of 1.7% at end-2014, based on revenue growth from improving national economy. Operating expenditure, which has been declining since 2010, is likely to grow by 3%-5% in 2015, after the autonomous community lifted cost-containment policies. Nevertheless, Fitch expects Cantabria's current balance to turn to positive in 2015 (-EUR47.4m in 2014) as subsidised borrowing limits interest costs.

Debt Funding From Central Government
Close to 50% of Cantabria's direct debt is with the central government and Fitch expects the share to continue to grow. This is particularly since under Royal Decree Law 17/2014 passed in December 2014, regional governments could benefit from zero interest rates from borrowings from the state's Regional Liquidity Fund. This is likely to represent a savings of around EUR35m in interest expenses for Cantabria in 2015.

Regional Economy Recovering
The performance of Cantabria's economy has been similar to the national average in recent year. The autonomous community has an estimated GDP per capita of 9%, just below the national average, and an employment rate of 45.5% in 2014, slightly above the national average of 45%. In 4Q14 the labour market showed a positive reversal, as total registered workers rose by 2%, after a strong 12.5% loss of jobs between December 2008 and December 2013. However, the unemployment rate at 19.4% is still significantly higher than the EU average and below the Spanish average of 24.4%, limiting taxpayers' contributions to the community's revenue growth.

Political Uncertainty
At the last regional elections on 24 May 2015 no party obtained enough seats to a form majority government and a coalition is likely to be formed. Fitch will observe the implemented fiscal policies as well as its main spending orientation.

RATING SENSITIVITIES
Continued overall deficits leading to direct debt exceeding 150% of current revenues could drive negative rating action.

The ratings could be upgraded if the operating margin exceeded 5% and the direct debt burden to current revenue stabilised at its current level.