OREANDA-NEWS. September 22, 2015.  Fitch Ratings has affirmed the Italian Autonomous Province of Bolzano's (PAB) Long-term foreign and local currency Issuer Default Ratings (IDR) at 'A' and its Short-term foreign currency IDR at 'F1'.The Outlook is Stable.

The affirmation reflects PAB's sound budgetary performance with an operating margin ranging between 25% and 30%, underpinned by a wealthy economy, as well as a nearly direct debt-free position.

KEY RATING DRIVERS
Institutional Framework (Neutral): Under Fitch's criteria PAB is eligible to be rated above the sovereign by virtue of its institutional strength and high degree of financial autonomy. PAB's special autonomous status entitles it to receive fixed shares of major national taxes, ranging from 90% personal income tax (PIT) and corporate income tax (CIT) to 80% of VAT. This underpins the province's tax revenue resilience and limits dependence on state transfers while a diversified set of responsibilities support its budgetary flexibility.

Contributions to national consolidation efforts are subject to bilateral agreements and will account for about EUR500m from 2019 to 2023, or about 0.5% of Italy's interest burden. The leeway of a maximum two notches above the 'BBB+' sovereign rating captures possible interferences by the state in case of macroeconomic stress and/or stressed sovereign finances with subsequent risks of weakening predictability of intergovernmental relations. Fitch therefore considers Italian inter-governmental relations as "Neutral" for Bolzano.

Fiscal Performance (Strength): PAB's budgetary flexibility is a positive rating factor, with room to moderate/delay transfers and capital expenditure of up to EUR1bn if need be.
Fitch expects Bolzano's operating expenditure, at EUR3.3bn in 2014, and primarily made up of healthcare, social services and education, to grow up to EUR3.6bn by 2017, reflecting responsibilities taken over from the Region Trentino Alto Adige, such as administrative and organisational support to the judiciary. We expect current revenue to gradually increase towards EUR5bn by 2017, on the back of a growing tax base and increased VAT share (to 80% in 2015 from 70%). Fitch believes that the region's investments of about EUR1.5bn per annum, mainly to support the economy and education, will be funded by tax revenue, leading to a continued balanced budget.

Debt (Strength): Fitch expects PAB's overall liabilities, including municipalities' and subsidiaries' debt, to decline to EUR0.8bn over the medium term (from EUR1bn in 2014), or 20% of current revenue. PAB's market debt will be repaid by 2015. Bolzano also received EUR150m non-interest bearing loans from Region Trentino Alto Adige and Alto Adige Finance, which will be repaid over time. PAB continues to have solid cash-generating capacity, supported by high tax compliance.

Economy (Strength): PAB is one of the wealthiest subnationals both in Italy and Europe, with a GDP per capita nearly 50% above the EU average, an employment rate at 70% and a low youth unemployment rate of 12.4% (vs. 42.7% in Italy). After a stagnant 2014, Fitch expects manufacturing and agriculture to drive local GDP to grow of about 1% per annum over the medium term, with unemployment rate remaining at around 4%.

Management (Strength): PAB maintains a conservative and prudent budgeting policy with a tight control on its municipalities' and subsidiaries' debt, while maintaining free reserves at about 5% of revenue. PAB maintains a high standard of services in health care with per capita spending 20% above the national average. Investments kept at around 30% of total spending and tax breaks for households and businesses are aimed at strengthening internal demand and economic activity, in turn underpinning PAB's revenue.

RATING SENSITIVITIES
PAB's IDRs move in parallel with those of Italy due to its standalone profile being constrained by the sovereign's rating. A rating action on the Republic of Italy would translate into a corresponding rating action on PAB.

A decline in the operating margin towards 10%-15%, due to a looser grip on spending and/or a fall in revenue, or a growth in direct and indirect debt liabilities beyond expectations could lead to a downgrade.