OREANDA-NEWS. November 11, 2015.  Fitch Ratings has affirmed the Region of Veneto's Long-term foreign and local currency Issuer Default Ratings (IDR) at 'BBB+' with Stable Outlooks and Short-term foreign currency IDR at 'F2'. The affirmation affects the region's approximately EUR800m outstanding bonds.

The affirmation reflects the region's stable albeit weak operating performance at around 2% of operating revenue, and moderate debt, accounting for less than 30% of the budget. The ratings also reflect Veneto's sound liquidity position and wealthy socio-economic profile, helping to support its tax base. Veneto's standalone profile remains constrained by Italy's IDR due to a lack of financial autonomy of the ordinary statute regions.

KEY RATING DRIVERS
Institutional Framework (Neutral)
Fitch assesses Italian inter-governmental relations as "Neutral" for Veneto's s ratings. The region benefits from national state support, such as subsidised loans with long-term tenures/maturities. However, it also remains subject to contributing to Italy's consolidation efforts to balance the national accounts, with repeated revenue curtailments compressing performance.

Debt and Liquidity (Strength)
Veneto's liquidity averaged EUR1bn over the past few years. However, it may weaken over the medium term as relaxation of spending rules by the national government may lead the region to carry out investments already committed. These translated into a fund balance deficit of nearly EUR2bn in 2012-2014.

Veneto's financial debt totalled EUR2.8bn at end-2014, when adjusted for around EUR1.6bn of state-subsidised borrowing in 2013-2014. Fitch expects new borrowing of about EUR1bn in 2015-2017 to increase direct debt towards EUR3.5bn by 2017, or about one-third of operating revenue. Debt service requirements will remain modest at around 2% of revenue.

Fiscal Performance (Weakness)
Fitch expects Veneto's operating surplus to continue hovering around EUR250m over 2015-2017, fully covering debt servicing requirements. After a EUR1.5bn recapitalisation of the health care sector in 2013-2014, which contributed to shrinking the settlement of commercial bills below 100 days in 2015 from 250 in 2010, Fitch expects the region will phase in an investment cycle of EUR1.6bn over 2015-2017. Capital spending sized to capital transfers will help the region post a balanced budget over the medium term alongside national requirements.

Management (Neutral)
Fitch believes Veneto will be able to maintain a balanced health care sector, which absorbs 80% of budget resources. As the national government may partly freeze regions' tax raising flexibility (for Veneto it currently accounts for about 10% of revenue) the region is bracing for cost curtailment. Fitch expects operating spending to rise by 1% in 2014-2017

Economy (Strength)
With nearly five million residents, Veneto ranks fifth in Italy in terms of population. The region is one of the strongest manufacturing Italian hubs, the second-largest exporter among the Italian regions, with GDP per capita 15% above the EUR-28 average and unemployment rate of 6.5%. Growing tourism and recovering industrial sectors are absorbing the employment base. Fitch expects Veneto's GDP to grow by about 1% in 2015 from about EUR147bn in 2014, driven by exports of machinery, shoes and leather, glasses and medical devices towards extra UE-28 countries, such as US and emerging markets.

RATING SENSITIVITIES
Veneto's IDR remains constrained by Italy's rating as per Fitch's criteria. An upgrade would be contingent on an upgrade of Italy's sovereign rating as long as the region continues to perform in line with Fitch's projections, maintaining an intrinsic credit profile higher than the IDR.

Conversely, Veneto's IDR could be downgraded if its intrinsic credit profile were to weaken with the current margin dropping to negative value (on a permanent basis) amid a widening fund balance deficit.