OREANDA-NEWS. Fitch Ratings has affirmed the Autonomous Community of Andalusia's Long-term foreign and local currency Issuer Default Ratings (IDR) at 'BBB-' with Stable Outlooks. Fitch has also affirmed the Short-term foreign currency IDR at 'F3'. The 'BBB-' ratings on Andalusia's outstanding senior unsecured bond issues have also been affirmed.

The affirmation reflects no changes since the last review on the rating floor applying to Spanish autonomous communities. The Outlook is Stable and Fitch will monitor debates regarding state support, after the general elections scheduled in December 2015.

KEY RATING DRIVERS
The ratings are supported by the 'BBB-' rating floor for Spanish autonomous communities. The rating floor is based on a number of supporting factors that contribute to improving a region's liquidity and reducing the likelihood of default. These include the budgetary stability law and the recent law controlling commercial debt; the absolute priority of debt servicing by law as per article 135 of the Spanish Constitution; and the access to the state support mechanisms such as the Regional Liquidity Fund (FLA) and the Financial Facility Fund (FFF).

Central Government Support
In Fitch's view, access to the state support mechanisms will continue to ensure timely debt servicing for Andalusia. At end-2014, the region had received a total EUR16.4bn or 58% of direct debt from state support funds, an illustration of strong support from the central government. On 26 December 2014, the Ministry of Finance and Public Administration introduced the Royal Decree Law 17/2014 to enhance the financial state support to the Spanish regions in place since 2012, by introducing a new instrument - the FFF - for regions that are compliant with the stability goals; and another to fund the regional governments' social service provision.

Andalusia will receive a total of EUR3bn in 2015 from the FFF, which is expected to cover its borrowing needs for the year, and an additional EUR80m from the Social Fund. Debt contracted under both instruments carry zero interest in 2015, and additionally the FFF funds will not incur interest expenses until 2018. Andalusia is eligible to receive FFF funds as it met the fiscal deficit goal in 2013. In 2014, direct debt rose by more than 20% to EUR27.9bn, and under Fitch's base case scenario, it may increase to over EUR31bn by 2016 or 148% of current revenues. Andalusia faces significant debt redemptions over 2015-17, but Fitch believes any refinancing risk will be mitigated by access to state support.

Timid Improvement, Weak Intrinsic Credit Metrics
Andalusia's standalone credit profile is weaker than its ratings indicate due to its reported negative operating and current balances since 2011 and increasing debt burden. It reported a negative operating balance of EUR414m in 2014, an improvement from negative EUR695m in 2013, but still insufficient to stabilise its accounts. Economic recovery translated into an increase in tax collection of 2% in 2014, a trend we expect to continue over the next two years. Coupled with a moderate increase in operating expenditure and interest savings due to the state support mechanisms, we expect the region to post a positive operating balance, albeit limited, over 2015-2016. The ability to meet the fiscal deficit goal for 2015 of 0.7% will depend on capex containment, as was the case in 2014. Andalusia is committed to complying with fiscal targets, as evidenced by a fiscal deficit of 1.16% for 2014, close to the 1% goal. Fitch considers it likely that Andalusia's operating performance will improve in the medium term, even under the current funding system.

Regional Economy Recovering
Andalusia has a weaker economic profile than Spain, with a GDP per capita equivalent to 74% of the national average, albeit average by international standards. GDP grew 1.3% in 2014, and Fitch expects the figure to be above 2% over 2015-2016, in line with Spain's. The regional government is implementing a number of programs to fight against the informal economy, which is positive for regional labour market and revenues.

RATING SENSITIVITIES
As Andalusia's IDR's are supported by the 'BBB-' rating floor for Spanish autonomous communities, they would likely be downgraded if the floor is removed.

An improvement of the budgetary performance coupled with debt stabilisation could bring Andalusia's intrinsic credit profile closer to the floor.