OREANDA-NEWS. Increasing political tensions could weaken the Sicilian authorities' ability to keep costs under control and improve revenues, potentially undermining the region's recent fiscal progress, Fitch Ratings says.

Governor of Sicily, Rosario Crocetta, suspended himself earlier this month, but told the regional assembly on Thursday that he would not resign in response to what he described as a smear campaign following allegations in a magazine article. The political consequences are uncertain and may depend on whether opinion in the Democratic Party (PD), to which Mr Crocetta belongs, favours early regional elections.

Prolonged political uncertainty could weaken the process of fiscal consolidation in Sicily in recent years. Lower spending on personnel and on transfers to local authorities since 2013 have helped to eliminate the region's operating deficit of nearly EUR1bn, or 7% of revenue. The authorities' efforts to stabilise current spending at around EUR14bn per annum, while improving revenue by securing the return of tax revenue from the central government, underpin the Stable Outlook on Sicily's 'BBB' rating.

However, challenges to maintaining consolidation are growing. A long recession that has doubled the unemployment rate to 23% and cut regional GDP by 15% since 2008 has reduced tax generation capacity.

Against this backdrop, expenditure control appears to have become more politically contentious. Ministerial turnover is high and last November a technocrat, Alessandro Baccei, was appointed as finance commissioner ahead of the 2015 budget to secure nearly EUR200m of cost reductions in a wide range of areas including transfers to the broader regional public sector.

The Sicilian government is negotiating the return of EUR0.9bn of annual revenue withheld by the central government to reduce the national deficit. A political agreement appeared to have been reached last week, but if it is not enacted via national legislation, the ability to increase Sicily's operating surplus to 3%-5% of revenue over 2015-2017 would be at risk. Failure to achieve this surplus, which is instrumental to covering annual debt servicing requirements, would put Sicily's rating under downward pressure.