OREANDA-NEWS. October 13, 2015.  Fitch Ratings has affirmed the Historical Territory of Gipuzkoa's Long-term foreign and local currency Issuer Default Ratings (IDRs) at 'A' with Stable Outlooks and Short-term foreign currency IDR at 'F1.

The affirmation reflects Gipuzkoa's ability to maintain a solid fiscal performance relative to its own budget as well as maintaining a stable level of debt.

The Stable Outlook reflects that on Spain (BBB+/Stable). A new provincial government was elected in May 2015 and is poised to elaborate its first budget. Fitch will monitor and analyse its priorities.

KEY RATING DRIVERS
Institutional framework: Gipzukoa can be rated higher than the Spanish sovereign because of its financial and fiscal autonomy and the institutional recognition in the Spanish constitution, which mitigates sovereign unilateral interferences on the issuer as per Fitch's criteria. The ratings reflect Gipuzkoa's special status, solid socio-economic profile, proven ability to maintain a stable and sound operating performance, and relatively low debt burden. The ratings also takes into account its prudent management and strong liquidity.

In common with the other two Basque provinces, Gipuzkoa has a special legal and fiscal status, which is explicitly recognised by the Spanish constitution. Under this regime, the provinces benefit from a special tax arrangement, whereby they have wide fiscal powers and are entitled to levy and collect taxes in the province and also have the authority to set rates on a number of taxes, primarily personal income tax, which gives them wide fiscal flexibility. Part of the fiscal receipts have to be transferred to other tiers of government under an established agreement. This is a positive rating factor as it gives them wider fiscal flexibility.

Economy: Gipuzkoa is a wealthy province by national and international standards, with GDP per capita estimated in 2012 at 34.7% above the Spanish average. In common with northern Spain, around 20.6% of its population is aged over 65 years, increasing social services costs for which the provincial administration is partly responsible, such as the provision of retirement homes. The labour market is recovering after the crisis years and the number of registered workers grew by 1.3% in 2014, although this was below the national rate of 2.4%.

Fiscal Performance: The province has reported solid fiscal performance. Gipuzkoa recorded a positive current balance over the past five years, with adjusted operating margins, excluding agreed transfers, averaging 20%. They are projected to remain within this percentage during the forecast period to 2017. The improved economic prospects in the province, and the active campaigns against tax fraud, should contribute to a further rise in fiscal revenues in the medium term. Under Fitch's base case scenario, the current balance to adjusted current revenues is expected to remain above 15% over 2015-2016.

Debt: The province actively manages its debt, combining lines of credit and long term loans. Therefore direct debt fluctuated over 2006-2014. At end-2014, the debt burden was 76.3% of adjusted current revenues, mitigated by Gipuzkoa's strong liquidity as it directly collects taxes and keeps a strong cash position covering three-year amortisations, in line with its intrinsic credit strength. Debt amortisation reached a peak of EUR90m in 2014 and will be lower over the next years, as the administration has a policy to reduce overall debt. In addition, as Gipuzkoa collects all taxes in the province it has strong liquidity. Gipuzkoa's operating balance has more than twice covered its debt service requirement in recent years. Direct debt over current balance remained a low 5.4 years in 2014 and Fitch expects it to remain below 4.5 years through to 2016.

RATING SENSITIVITIES
An improvement of the labour metrics coupled with an enhanced operating performance could lead to an upgrade of the province's intrinsic credit profile and subsequently the IDR. Operating balance not fully covering annual debt service requirements would result in a downgrade of its IDR.

A downgrade of the sovereign would trigger a downgrade of Gipuzkoa's IDRs as the province is presently at the maximum leeway above the sovereign rating.