OREANDA-NEWS. September 21, 2015. Fitch Ratings has affirmed the Flemish Community's (Flanders) Long-term foreign and local currency Issuer Default Ratings (IDR) at 'AA', with a Negative Outlook, and its Short-term foreign currency IDR at 'F1+'. The senior unsecured ratings have also been affirmed at 'AA'/'F1+'. The commercial paper programme has been affirmed at 'F1+'.

KEY RATING DRIVERS
The affirmation reflects Fitch's expectations for the Flemish Community to continue posting strong budgetary performance, allowing a high self-financing capacity and sound debt coverage ratios. The ratings also take into account its solid socio-economic profile based on its attractiveness as a business destination. The Negative Outlooks reflect those on Belgium's IDRs (AA/Negative/F1+).

Flanders' diversified industry, highly qualified workforce and outstanding infrastructure make it an attractive business destination. The Flemish economy is more volatile than the national economy due to its export-oriented profile, but it has a structurally low rate of unemployment and higher GDP per capita than the country as a whole.

According to Fitch's base-case scenario, Flemish's operating balance will remain sound at 10.5% of operating revenue in 2018, up from an expected 6.2% for 2015. Despite newly devolved responsibilities and Flanders' contribution to the consolidation of Belgian public finances, Fitch expects performance to be supported by structural measures limiting operating expenditure growth, while the new equalisation mechanism will mitigate the financial impact of the institutional reform over the next 10 years.

Fitch considers that the impact of unexpected budgetary shortfalls would be mitigated by prudent budgeting, contingency planning and, ultimately, fiscal leeway. Under Belgium's sixth state reform Flemish Community will, form 2015, gain greater fiscal autonomy, equivalent to 15.4% of operating revenue. Revenues - linked to federal taxes and indexed to GDP growth and inflation - would continue to be underpinned by the dynamism of Flanders' economy. Expenditure flexibility, however, is limited by an indexation formula and multi-year contracts.

Over the medium term, based on an expected balanced budget and an average of EUR3bn of capital expenditure per year, we expect the direct risk payback ratio (including PPPs) to remain in line with 'AA' rated peers in 2018 at 6.3 years. At end-2014, direct risk reached EUR21.4bn (of which EUR4.6bn was direct debt), or 78.4 % of current revenue, with an average duration of direct debt at 2.4 years. Flanders' refinancing risk is moderate and is mitigated by high debt service coverage and predictable cash flows.

Liquidity is underpinned by predictable cash flows and strong access to short-term funding, owing to a EUR3bn credit line with ING Belgium (A+/Negative/F1+) and a EUR1.5bn Belgian commercial paper programme.

Fitch considers the Flemish Community's financial management to be highly efficient, notably in terms of its forecasting ability, which allows the Flemish Community to control its annual budgetary performance and debt commitments.

RATING SENSITIVITIES
A downgrade could stem from a consistently weak performance with an operating margin below 5 %, combined with an increase in private-public partnership (PPP) exposure resulting in a direct risk payback ratio (direct risk to current balance) structurally of more than eight years. A downgrade of Belgium would also be reflected in the Flemish Community's ratings.

The Flemish Community's ratings could be upgraded following a similar rating action on Belgium, provided budgetary performance remains in line with our expectations.