OREANDA-NEWS. January 26, 2016. Fitch Ratings has affirmed the Italian Region of Calabria's Long-term foreign and local currency Issuer Default Ratings (IDRs) at 'BBB' and Short-term foreign currency IDR at 'F2'. The Outlooks are Stable.

The affirmation reflects our expectations of low debt and a protracted low operating margin as Calabria's own revenue is weakened by prolonged economic slackness. The Stable Outlook balances the risks of weaker operating performance, as years of spending rationalisation may undermine the region's resolve to keep costs under control in the health care sector, with the chance of the operating margin exceeding projections following higher than expected budget allocations from the national government.

KEY RATING DRIVERS
Fiscal Performance (Weakness)
Fitch expects Calabria to have posted an operating margin of about 1% in 2015, in line with its baseline scenario of 1%-2% operating margin over the medium term. With national and EU subsidies largely funding the region's EUR7bn capex for transport, hospitals and economic development, Fitch expects Calabria's budget to be roughly balanced over 2016-2020, when adjusted for the use of reserves, which were EUR1.5bn in 2015.

Debt and Liquidity (Strength)
Debt was EUR1.4bn in December 2015 and we expect it to remain close to EUR1.5bn in the medium term, or one-third of Calabria's current revenue. Liquidity at the core administration level remains strong, at EUR1bn or 10x annual interest and principal repayment, although cash reserves will decline as pre-2010 arrears (roughly EUR0.5bn) of the health care units are paid and the region increases investments following relaxation of capital spending by the national government.

Management (Neutral)
Calabria is one of the few Italian regions that aims to maintain free reserves (EUR150m), which declined to about 3% of operating revenues in 2015 by Fitch's calculations, from an average of 5% in 2010-2014, following a budget clean-up. At the same time, delays in boosting the administrative capacity of its health care units and clear arrears in the payment of suppliers negatively affect the local entrepreneurial mood/activity.

Economy (Neutral)
Calabria's economy stabilised in 2015, ending a seven-year recession, which reduced the employment base by about 12%. While a large unofficial sector mitigates the impact of economic weakness, a modest pick-up in the number of new companies, growing tourist arrivals point to modest GDP growth of 0.5% in 2016, albeit with a limited boost to employment. With the structural unemployment rate at around 20%, Fitch expects limited or no contribution from the economy to Calabria's direct tax growth in the short to medium term, adding to the prolonged rigidity of the operating budget.

Institutional Framework (Neutral)
Fitch assesses Italian inter-governmental relations as "Neutral" for Calabria's ratings. Subnationals with a weaker economic base receive subsidies to ensure services are provided at national standards. However, weak enforcement of prudential regulation to preserve fiscal balance largely offsets the predictability offered by revenue equalisation and at times leads to off-balance sheet liabilities. Compulsory amortising debt structures and repayment of financial debt in priority over commercial liabilities provides confidence of timely debt servicing even in case of liquidity stress.

RATING SENSITIVITIES
Failure to maintain an operating surplus on a sustainable basis could result in negative rating action. A significant economic recovery halving the unemployment rate combined with an improvement in the region's operating margin towards 5% could lead to positive rating action.