OREANDA-NEWS. September 29, 2015.  Fitch Ratings has affirmed the City of Pamplona's (Pamplona) Long-term foreign and local currency Issuer Default Ratings (IDR) at 'BBB+' with Stable Outlook. Fitch has also affirmed the Short-term foreign currency IDR at 'F2.'

The affirmation reflects Fitch's current expectations that the City of Pamplona will maintain a sound and steady operating performance and high and stable liquidity. The affirmation also reflects moderate direct debt and a strong and improving economy in the medium term. The Stable Outlook factors in a moderate reduction of direct debt until 2017. The new executive is deliberating on the 2016 draft budget and Fitch will monitor its development.

KEY RATING DRIVERS

Strong and Improving Economy
Pamplona is the capital of the region of Navarre and represents a high 31% of the region's population. Pamplona's economy is wealthy as it functions as an important administrative, political and economic centre in Navarre. Pamplona is also an important service centre in the region through its location for prestigious private health clinics and university centres, contributing to the dynamism of the local economy.

Its strong economy is also demonstrated by a higher-than-average regional employment rate at 50.3% in 2014 versus 45.1% nationally, despite a more pronounced share of elderly population, and by a regional GDP per capita being 23.5% above the national. Total registered workers rose 2% yoy in 4Q14, and regional GDP grew 1% yoy in 2014, above the national 0.9%.

Sound and Steady Budgetary Performance
Pamplona's steady and sound operating revenue is largely driven by significant current transfers from Navarre (44% of its operating revenues) due to its special status as the capital of Navarre. The 2016 draft budget will be presented shortly and Fitch will monitor any budgetary impact of implemented fiscal policies and key spending items. We currently expect the operating margin to remain sound for 2015-2016 (10.6% at end-2014). Pamplona's current balance was higher in 2014 at EUR19.7m in 2014 from EUR17.1m in 2013, due to stronger property tax revenue and higher current transfers from Navarre.

Moderate Direct Debt
Fitch's base case scenario assumes direct debt will remain moderate at close to 53%-55% of current revenue or EUR99m-EUR100m at end-2015, little changed from 55.2% or EUR102m in 2014. Direct debt increase has been limited since 2009 at EUR0.7m, as the city used its surplus to repay debt, leading to a moderate 22.7% of direct debt maturing over the next three years. Pamplona's high cash position is stable, which means that it has had no need to contract credit lines or apply for state funding support.

Change of Government
The local elections on 24 May 2015 saw the formation of a coalition government between left wing parties Euskal Herria-Bildu, Aranzadi, Izquierda-Ezquerra and the centrist left wing party Geroa Bai. This has resulted in a fragmented city council political composition.

RATING SENSITIVITIES

The Stable Outlook mirrors that on the sovereign's Long-term IDRs and the IDRs are constrained by the sovereign's (BBB+). Therefore Pamplona's ratings are sensitive to changes of the sovereign rating. A sovereign upgrade would likely result in an upgrade of the city's ratings, provided the city continues to post a sound operating margin and a moderate direct debt-to-current revenue ratio.

Although this scenario is unlikely, the ratings could be downgraded if debt repayment increases significantly above 55% of the city's current balance expected for 2016 and 2017 (2014: 35%), together with the operating margin falling sharply below 5% (2014: 10.6%).