OREANDA-NEWS. Fitch Ratings has affirmed the Autonomous Community of Cantabria'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 'F2.'

The affirmation reflects the improvement in Cantabria's fiscal performance in 2015, from a rather weak fiscal performance, as well as a moderately high debt burden and expected financial support from the central government. The affirmation also reflects the improvement in Cantabria's economy and in particular a higher employment rate. The Stable Outlook incorporates Fitch's expectations that the fiscal performance will improve gradually and direct debt will rise until 2017 to around the 130%-135% range of its expected current revenues from 116.6% in 2014.

KEY RATING DRIVERS

Expected Improvement in Operating Performance
There is a new government in Cantabria, which is poised to approve its first budget in 2016. Fitch still considers that Cantabria's operating performance should gradually improve, with an operating margin of 4%-6% over 2015-2017 (1.7% at end-2014). This essentially stems from revenue growth from the improving national economy. Operating expenditure, which has been declining since 2010, should now grow by an average 2.6% over 2015-2017, after the autonomous community lifted cost-containment policies.

New Government, No Majority
At the last regional elections on 24 May 2015, a coalition was formed between the regionalist wing party Partido Regionalista de Cantabria, with the support of the socialist wing party, returning to power after the centre-right wing party Partido Popular was in power in the last mandate. This has resulted in a fragmented political composition, with new political orientations translated into the 2016 draft budget presented in November. This indicated a significant 4% yoy growth in operating spending largely on social programmes and on industry, as well as 4% yoy growth in operating revenues in resources from the central government.

General elections are scheduled for December 2015, and debates on a new funding system for Spanish regional governments should start afterwards. This will be an important factor for Cantabria's IDR. Nevertheless, Fitch considers that it is still too early to assess its impact.

Moderately High Direct Debt
Cantabria will receive a total EUR496m in 2015 from the Regional Liquidity Fund (FLA), expected to cover its borrowing needs for the year. It is expected to receive EUR318m in 2016. This would result in an expected direct debt of around EUR2.3bn-EUR2.5bn between 2015 and 2016 or 124%-129% of its expected current revenues from EUR2.1bn at end-2014 (116.6% of current revenues). The direct debt calendar at end-2014 shows stable annual debt repayment with a total for the next three years of EUR745m, representing about 34% of its direct debt in the next three years.

State Financial Support
The regional government had received EUR1bn (close to 50% of total direct debt) through state mechanisms by end-2014. The central government intensified its financial support on 23 December 2014, when the Ministry of Finance and Public Administration introduced further measures to ease the debt burden of autonomous communities within the FLA and Supplier Fund (FFPP) at zero interest rates. For Cantabria, this will result in interest expense savings in 2015 of EUR23.4m since 2014 on funds contracted under the FLA and FFPP.

Regional Economy Recovering
With an estimated nominal GDP of EUR12.2bn, Cantabria's economy is recovering. This is demonstrated by nominal annual GDP growth of 0.6% in 2014, job creation of 3.5% in October 2015 since December 2014 and an employment rate of 47.4% in 3Q15 from 45.8% in 4Q14. However, at 16.3% in 3Q15 the unemployment rate is still significantly higher than the EU average and below the Spanish average of 21.3%, limiting taxpayers' contributions to the autonomous community's revenue growth.

RATING SENSITIVITIES
The ratings could be upgraded if the operating margin consistently exceeds 5% and the direct debt burden to current revenue stabilises at its current level (2014: 116.6%).

Negative operating balance combined with direct debt exceeding 150% of current revenue could drive negative rating action.