Fitch Affirms Italian Region of Lazio at 'BBB'; Outlook Stable
The affirmation reflects Fitch expectations that Lazio's debt liabilities will be little changed at around 150% of revenue in 2015-2017, as a gradual economic recovery helps to underpin the region's strengthening operating performance.
KEY RATING DRIVERS
Fiscal Performance (weakness): Fitch expects Lazio's operating surplus to double to 8% of revenue in 2015-2017, or EUR1bn, based on the region's increased personal income tax (PIT) surcharges. An increase of EUR300m, or 3%, in health care allocations from 2015 following a population recount could make room for tax cuts on low earners and restore some tax-raising potential. Yet with a fund balance deficit of nearly EUR4bn Lazio remains constrained in resources. Real estate asset sales and capital subsidies from the EU will fund the majority of investment, primarily in transport, health and economic development, which Fitch expects to average EUR0.75bn per annum, a low 5% of total spending, which should keep budget close to balance in 2015-2017.
Economy (strength): Lazio's economy remained stagnant in 2014 according to Fitch's estimates, with the unemployment rate close to 12.5%. However, the EUR9bn of arrears paid off by the region in 2013-2014 have eased local SMEs' liquidity stress, and have contributed to a 1.3% growth in the number of registered companies, against a general decline in Italy. Fitch expects the region to see a mild GDP recovery of 0.5% in 2015 and 1% in 2016 driven by commerce and tourism. A resilient and slightly growing employment base of 2.25 million.-2.4 million workers should underpin revenue growth towards EUR15bn by 2017, up from EUR13.5bn in 2013/2014.
Debt (weakness): Long-term debt rose to EUR20bn in 2014, from about EUR12bn in 2011-12 as Lazio front-loaded the restoration of the fund balance by financing past commitments with EUR9bn subsidised state loans, whose 30-year maturity extended the region's debt average life to 17 years. While gross debt liabilities account for nearly 150% of operating revenue, market loans and bonds represent only a tenth, reducing default risk considerably. Fitch envisages Lazio's debt to remain fairly stable with EUR0.5bn new borrowing per year in 2016-2017 matching principal repayment.
Institutional framework (neutral): Fitch assesses Italian inter-governmental relations as "Neutral" to Lazio's ratings. Weak enforcement of prudential regulation aimed at preserving fiscal balance lead, at times, to off-balance sheet liabilities, such as Lazio's fund deficit which is nonetheless being reduced from EUR6bn in 2011-2013. Legislation allows the repayment of financial debt in priority versus commercial liabilities in case of liquidity stress while the national government steps in when a subnational finds itself unable to deliver basic services.
Management (neutral): Lazio is implementing a new accounting system, which could reduce receivables and payables by stripping them of administrative, or pro-forma, components. Progress in the consolidation of the balanced budget in the health care sector following a reduction in the number of hospitals will free up part of the revenue withheld by the national government. Fitch expects Lazio's healthcare liabilities to continue declining towards EUR1bn by end-2015, from EUR6bn in 2013. This should enable the sector to settle bills within 60 days from invoice, a sizeable improvement compared with 250 days of the past two decades.
RATING SENSITIVITIES
A weaker-than-expected budgetary performance with an operating balance insufficient to cover debt servicing requirements leading to an increase in commercial liabilities and reliance on preferential payments for timely debt servicing could result in a downgrade.
A stronger-than-expected economic recovery fuelling growth of the tax base and budget flexibility coupled with debt liabilities trending towards 1x of the budget could lead to a positive rating action
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