OREANDA-NEWS. August 04, 2015.  Fitch Ratings has affirmed the Italian Region of Calabria's Long-term foreign and local currency Issuer Default Ratings (IDRs) at 'BBB', and its Short-term foreign currency IDR at 'F2'. The Outlooks are Stable.

The rating affirmation reflects our expectations of low debt as well as a protracted weak operating margin as Calabria's own revenue are enfeebled by prolonged recession. The Stable Outlook reflects the evenly balanced risks of an improvement or deterioration in the region's operating margin.

KEY RATING DRIVERS

Fiscal Performance (Weakness/Stable): Fitch expects Calabria to continue exhibiting weak operating performance over the medium term. Savings in the health sector through arrears repayments and in the transport sector by phasing in tenders will help improve the operating margin to 2% in 2016/2017 from a preliminary 1% in 2014, thereby covering debt servicing requirements. Adjusted for the use of the fund balance surplus for funding the region's EUR7bn capex, Fitch expects Calabria's budget to be in balance over 2015-2020.

Debt and Liquidity (Strength/Stable): Debt stood at EUR1.2bn in June 2015 and we expect it to remain close to EUR1.5bn in the medium term, or one third of Calabria's current revenue. Liquidity at the core administration level remains at EUR0.5bn or 5x annual interest and principal repayment, although cash reserves will decline as pre-2010 arrears are repaid. Such arrears are expected to decline to EUR0.5bn by 2015 from EUR2bn, or 40% of the budget, in 2013 while commercial obligations from the 2015 budget are expected to be paid on time.

Management (Neutral/Stable): Calabria is one of few Italian regions that aims to maintain free reserves, which accounted for about 5%-10% of operating revenues in 2010-2014 based on Fitch's calculation. The region aims to capitalise on the national government's partial relaxation of spending rules by speeding up investments, which could triple to EUR1.5bn per annum in 2015-2017, or 25% of the budget. Capex will be funded by EUR2bn of earmarked revenue, as well as by future capital subsidies of nearly EUR5bn for 2015-2020, in a bid by the government to kick-start economic growth.

Economy (Neutral/Stable): Calabria's economy shrank 1.8% in 2014, marking the seventh consecutive year of contraction. While a large unofficial sector mitigates the impact of economic weakness, a modest pick-up in the number of new companies and growing tourist arrivals point to a modest GDP recovery in 2015, albeit with limited boost to employment. With the unemployment rate at around 20% Fitch expects limited or no contribution from the economy to Calabria's direct tax growth in the short-to medium- term, adding to budget rigidity.

Institutional Framework (Neutral/Stable): Fitch assesses Italian inter-governmental relations as "Neutral" to Calabria's ratings. Subnationals with a weaker economic base receive subsidies to ensure services are provided at national standards while remaining subject to curtailment of resources under the national consolidation efforts.

Weak enforcement of prudential regulation to preserve fiscal balance largely offset the predictability offered by revenue equalisation and, at times, leads to off-balance sheet liabilities. Although repayment of financial debt is prioritised over that of commercial liabilities in case of liquidity stress, tolerance of late commercial payments is diminishing as commercial suppliers are being cut off from bank credit.

RATING SENSITIVITIES

Failure to maintain operating surplus on a sustainable basis could result in a negative rating action. A significant economic recovery halving the unemployment rate combined with an improvement of the region's operating margin towards 5% could lead to a positive rating action