OREANDA-NEWS. August 17, 2015.  Fitch Ratings has affirmed the Spanish Autonomous Community of Asturias's (Asturias) 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 that Asturias will demonstrate moderate improvement of its fiscal performance, despite a continuously rather weak current balance and a moderately high direct debt burden, and that it will continue to benefit from financial state support.

KEY RATING DRIVERS

Financial State Support
Asturias's IDRs reflect potential state support, which mitigates the region's continuously rather weak budgetary performance and moderately high direct debt. The central government's support is illustrated by the introduction of the Budgetary Stability Law (BSL), and Law on control commercial debt, as well as by access to liquidity support mechanisms such as the Financial Facility Fund (FFF).

Improving Fiscal Result
Fitch expects Asturias's operating margin to improve to 2%-4% for 2015-2016, from 1.2% at end-2014, based on revenue growth driven by an improving national economy. Fitch's expectations of improvement in fiscal performance take into account operating expenditure growth of 2%-3% in 2015, after the autonomous community lifted cost-containment policies. These policies had led to a decline in operating expenditure by a cumulative 10% since 2009.

Moderately High Direct Debt
The expected improvement in the fiscal performance will slow down direct debt growth to EUR3.1bn-EUR3.2bn by end-2015, according to Fitch's estimates. Direct debt will be close to 105% of Asturias's current revenue at end-2015, up from 101.5% or EUR3bn in 2014. This indicates a high debt service-to-operating balance for that year.

Direct debt has been rising since 2010 (EUR1.4bn), because of declines in own taxes (14%) and in revenues (4%) from the funding system, leaving the region exposed to high refinancing risk (36.4% for next three years). This resulted in a negative current balance in 2014 of EUR63.4m (negative EUR4.4m in 2013) for the fourth consecutive year.

Debt contracted under state mechanisms in 2012 and 2013 represented a high 33% of outstanding direct debt at end-2014 and we expect this figure to rise in 2015. This is particularly in view of the new law RDL 17/2014 passed in December 2014, which provides state funding through the FFF at zero interest rates to regional governments that have complied with their stability goals. As a result, Asturias is likely to benefit from savings of around EUR38m in interest expense in 2015.

Regional Economy Improving
Asturias's population is largely concentrated (47%) in its capital City of Oviedo and the City of Gijon. Asturias's economy has performed in line with the national average in recent years. Its GDP per capita is equivalent to 89.3% of the national average and its employment rate of 40.9% is lower than the national 45%, given its larger proportion of elderly population and fewer immigrants.

RATING SENSITIVITIES
Direct debt exceeding 150% of current revenues and a negative operating balance for two consecutive years could result in a negative rating action.

The ratings could be upgraded if the regional government is able to maintain a sustainable positive current balance and keep direct debt below 100% of current revenue.

KEY ASSUMPTIONS
Fitch assumes that state supportive measures, such as liquidity support through the FFF, will continue in the medium term.