OREANDA-NEWS. July 28, 2015. Fitch Ratings has affirmed the Polish Region of Malopolska's Long-term foreign currency Issuer Default Rating (IDR) at 'A-', Long-term local currency IDR at 'A' and National Long-term rating at 'AA+(pol)'. The Outlooks are Stable.

The affirmation reflects Malopolska's solid operating and budgetary performance, supported by prudent strategic and financial management, which we expect to continue in the medium term.

KEY RATING DRIVERS
The ratings reflect the region's moderate debt, healthy debt ratios and flexibility on operating expenditure. Fitch forecasts Malopolska's operating results will remain solid in 2015-2017, with an average operating balance above of PLN120m or 14% of operating revenue. We expect the region's strong operating results to be supported by its policy of controlling operating expenditure growth below that of operating revenue.

Fitch expects that Malopolska direct debt will nominally increase, but should not exceed 55% of current revenue (52% in 2014). The debt service ratio should remain satisfactory in 2015-2017 at around 4 years (2014: 3.5 years). Fitch assumes that similar to previous years, the region will apply for EU funds to co-finance its capex estimated at PLN400m annually. The rest of capex financing may come from new debt and the region's own sources.

Like other Polish regions, Malopolska has more flexibility on its operating spending reflected in the moderate proportion of fixed operating costs (including staff costs) in the regional budget. They averaged 28% of total opex in 2013-2014. This high spending flexibility counteracts the region's limited revenue-raising flexibility as income tax rates are decided by the state and averaged 45% of operating revenue in 2014.

Due to underfunded contracts with the National Health Fund, regional healthcare entities may require financial support from Malopolska (through loans or guarantees) in the medium term. However, this should not put significant pressure on the budget as the sector's finances are in better shape than many other Polish regions.

RATING SENSITIVITIES
An upgrade of the sovereign rating, accompanied by the region's solid operating performance, coupled with declining pressure on debt-funded capex and low indirect risk, could trigger positive rating action.

The ratings could be downgraded if Malopolska's operating performance consistently weakens and direct and indirect debt growth above 80% of current revenue for two consecutive years.

KEY ASSUMPTIONS
Fitch expects that the region will continue its financial and strategic policy which supports its good operating results.

Fitch also assumes that the region will continue to comply with all the EU regulations and procedures when implementing investments projects co-financed by the EU.