OREANDA-NEWS. September 08, 2015. Fitch Ratings has affirmed the Spanish Historical Territory of Alava's (Alava) Long-term foreign and local currency Issuer Default Ratings (IDRs) at 'A' with Stable Outlook. Fitch has also affirmed the Short-term foreign currency IDR at 'F1'. The ratings on the senior unsecured outstanding bonds have been affirmed at 'A'.

The affirmation reflects Fitch's view that Alava continues to meet the agency's criteria for it to be rated above the sovereign (BBB+/Stable). Fitch considers that local and regional governments within the Basque Country meet the agency's conditions of institutional strength and financial autonomy. Alava is in charge of levying, collecting and inspecting most of the tax revenue generated within its boundaries. The Stable Outlook reflects that on Spain.

The affirmation also reflects Alava's solid socio-economic profile, ability to maintain stable and sound operating performance, and solid debt coverage. The ratings also takes into account the provincial administration's prudent management and solid financial reporting.

KEY RATING DRIVERS

Sound and Stable Operating Performance
Tax revenue rose 3.7 % yoy in 2014 to EUR1,948m and results for 1H15 indicate that tax revenue amounted to EUR1,096m, suggesting a strong tax performance for this year. Following a pre-established agreement, a large part of those taxes must be shared with other public administrations, and once discounted, leaves Alava with adjusted operating revenue of EUR530.5m in 2014.

The provincial government decided in 2014 to limit growth of operating spending to less than 2%, which led to a higher current balance of EUR122.6m, from EUR91.7m in 2013, or 23% of adjusted current revenue (6% of gross operating revenue).

As the national economy continues its recovery Alava should be able to maintain tax revenue growth to support higher operating spending. Under Fitch's base case scenario the provincial administration's current balance will be 4%-6% of current revenue over 2016-2017.

Nevertheless, following the elections in May 2015 and subsequent changes at the executive, Fitch will monitor implementation of fiscal policies, as well as key spending items.

Solid Debt Coverage
Direct debt grew rapidly during 2009-2014, mainly due to deficit financing. Direct debt totalled EUR519.5m in 2014, or almost 98% of the provincial administration's adjusted current revenue. Alava's direct debt pay back ratio was comfortable at 4.2 years in 2014. Debt repayments are significantly below the provincial administration's expected current balance and direct debt is not expected to increase in 2015-2016.

Strong Economy
Alava's demographics are characterised by a low population density, with 321,000 inhabitants representing 0.8% of the national population, and by being strongly concentrated in the capital, Vitoria. In common with northern Spain, a high 19% of its population is aged over 65. This equates to a high cost of social services. Alava has a healthy socio-economic profile and is much wealthier than other Spanish provinces with an estimated GDP per capita according to National Statistics Institute at 48.5% above the national average.

Housing prices were 39% above the national average in 2014; they fell 18.6% between 1Q09 and 1Q15 versus a 25.5% decline in Spain. The labour market has also fared better in Alava than in Spain, with a 11% drop in the total number of registered workers between 2008 and 2014, less than Spain's 16%. The unemployment rate in the province in 2Q15 was 15.5%, a rise from 7.5% in 4Q08, but much lower than Spain's 22.4%. The less severe impact of the downturn in Alava can be explained by the lower contribution made by the construction sector, and much lower household indebtedness.

RATING SENSITIVITIES
An upgrade of the sovereign would be a necessary condition for a positive rating action, as Alava is already two notches above the rating of Spain, the maximum allowed under Fitch's current criteria.

A downgrade could stem from a substantial increase in direct debt, which would contribute to a deterioration of direct debt servicing-to-current revenue ratio (2014: 2.6%). A downgrade of Spain would also trigger a downgrade of Alava.