OREANDA-NEWS. August 17, 2015. Fitch Ratings has affirmed the Autonomous Community Murcia's Long-term foreign and local currency Issuer Default Ratings (IDRs) at 'BBB-' with Stable Outlooks. Fitch has also affirmed the Short-term foreign currency IDR at 'F3'. The ratings on the senior unsecured outstanding bond issues have been affirmed at 'BBB-'.

KEY RATING DRIVERS

Murcia's ratings are supported by the 'BBB-' rating floor for Spanish autonomous communities. The rating floor is based on a number of supporting factors that contribute to improving a region's liquidity and reducing the likelihood of default. These include the budgetary stability law and a recent law on commercial debt restraint; the absolute priority of debt servicing by law as per article 135 of the Spanish Constitution; and access to state support mechanisms such as the Regional Liquidity Fund (FLA) and the Financial Facility Fund (FFF).

Central Government Support
The region had received a total of EUR4bn through state support mechanisms up to end-2014, illustrating strong support from the central government. This includes the FLA, which was established in 2012 by the central government to support Spanish regions facing difficulties in accessing capital markets, and the Supplier's Fund (FFPP), a mechanism to help regions pay their arrears to suppliers. Debt contracted under these mechanisms is repaid evenly over 10 years.

The region held elections on 24 May 2015 and the PP (popular party, centre-right wing) won for a sixth consecutive mandate, this time due to the support of the centrist party Ciudadanos. No major changes in fiscal policies are expected, but Fitch will monitor developments and assess any impact on the region's financial performance.

Increasing Central Government Funding
In Fitch's view, Murcia's access to state support will continue to ensure timely debt servicing, as the region faces substantial redemptions over the next three years, equalling 29% of outstanding debt as of 31 December 2014. Funds contracted under state mechanisms represented 61% of direct debt (EUR6.5bn) at end-2014, and Murcia expects to receive EUR737m from the FLA in 2015.

Expected improvement in fiscal performance will slow debt increase, and Fitch expects the debt-to-current revenue ratio to be under 205% in 2016, compared with 199% in 2014. The region issued in December 2014 a EUR50m senior unsecured bond with a nine-year maturity and 2.168% coupon.

Weak Intrinsic Credit Metrics
Murcia's fiscal performance remains weak, due to a limited ability to raise revenues, high debt levels and a weaker economic profile than Spain, with a GDP per capita equivalent to 81% of the national average in 2014. Murcia in 2013 received 12.2% less funding per inhabitant than the average of the 15 Spanish regions under the common regime and the region is reliant on a reform of the funding system to address this disparity.

Murcia has reported negative current balances since 2010 and its high debt burden means that the region's standalone credit metrics are weaker than its ratings indicate. Preliminary results showed the region posting a fiscal deficit of 2.86% in 2014, larger than its target of 1%. This was due to tight funding allocation from the central government, and the Regional Health Service exceeding its budget by more than EUR400m.

Murcia's fiscal deficit target for 2015 of 0.7% is difficult to achieve, even after considering additional interest savings approved by the central government in December 2014 through the state funding mechanism (EUR181m). Fitch expects a negative balance before debt variation of around EUR350m-EUR400m per year over 2015-2016.

Regional Economy Recovering
Murcia's economic performance in 2014 was positive as GDP grew 0.9% in nominal terms, the same rate as Spain. In real terms, the region grew 2% due to the extraordinary effect of deflation in 2014. Unemployment rate was 26.6% (2.2% higher than in Spain) in 2014, although the number of registered workers grew 8.9% as of end-2Q15 compared with December 2014, above the 5% recorded for Spain. The real estate sector continues to adjust as house prices fell 4.4% in 2014, more than Spain's 2.4%.

RATING SENSITIVITIES
As Murcia's ratings are supported by the 'BBB-' rating floor for Spanish autonomous communities, they would likely be downgraded if the floor is removed.

An upgrade may stem from a significant structural improvement in the budgetary performance and the debt metrics, although Fitch believes this is currently unlikely.

KEY ASSUMPTIONS
Fitch assumes that the state will continue providing support to the Spanish regions over the medium term. Moreover, Fitch will review the rating floor if state support measures are cancelled or if there is deterioration in the central government's ability and willingness to continue providing extraordinary support to the regions (see "State Support for Spanish Regions Reinforced and Extended" (March 2015) on www.fitchratings.com).