OREANDA-NEWS. February 16, 2016. Fitch Ratings has affirmed the Autonomous Community of Murcia Long-term foreign and local currency Issuer Default Ratings (IDRs) at 'BBB-' with Stable Outlooks. Fitch has also affirmed the Short-term foreign currency IDR at 'F3'. The ratings on the senior unsecured outstanding bonds have been affirmed at 'BBB-'.

The affirmation reflects the unchanged BBB-/Stable rating floor applied to Spanish autonomous communities. Fitch expects this mechanism to remain in place in the foreseeable future. The agency will monitor the debate regarding liquidity support from the central government to Spanish regions.

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 access to the state liquidity mechanisms such as the Regional Liquidity Fund (FLA) and the Financial Facility Fund (FFF).

Central Government Support
The region had received a total of EUR5.2bn (approximately 65% of direct debt) through state liquidity mechanisms at end-2015, illustrating strong support from the central government. This includes the FLA, which was established in 2012 by the central government to support Spanish regions facing difficulties in accessing capital markets, and the Supplier's Fund (FFPP), a mechanism to help regions pay their arrears to suppliers. These mechanisms are repaid evenly over 10 years.

In Fitch's view, Murcia's access to state support will continue to ensure timely debt servicing, as the region faces high redemptions over the next three years, exceeding 25% of outstanding debt at end-2015. Funds contracted under state mechanisms represented 60% of direct debt (EUR6.5bn) at end-2014. Under Fitch's base case scenario, Murcia's funding needs of EUR1bn in 2016 will mostly rely on the FLA. The expected improvement in the fiscal performance will mitigate the relative debt burden, so that the debt-to-current balance ratio will not exceed 200% in 2016, in line with 2014, according to Fitch.

Weak Budgetary Performance
Murcia's negative current balances since 2010 and high debt mean that the region's standalone credit metrics are weaker than its ratings indicate. November preliminary results from the Ministry of Finance and Public Administration (MinHap) showed Murcia breached the 0.7% fiscal deficit goal in 2015, and Fitch expects it to hover around 2.5-3.0%. This was due to tight funding allocation from the central government, and the Regional Health Service structural deficit, which exceeded EUR400m in 2013 and 2014. In 2013 Murcia received 12.2% less funding per inhabitant than the average for the 15 Spanish regions under the common regime and the region is reliant on a reform of the funding system to address this disparity.

Expected Improvement in 2016
The regional elections in May 2015 maintained the PP (popular party, centre-right wing) in power with a minority government. The 2016 budget was drafted and includes a significant increase in operating revenues, mainly driven by the EUR195m positive settlement from 2014, coupled with a low interest burden eased by the state mechanisms. Social expenditure, particularly healthcare, will also grow by close to 6%, which will reduce the deficit of the Regional Health Service. We estimate the current margin will improve to close to minus 2.0% in 2016 from minus 8.4% in 2014, although meeting the fiscal deficit goal at 0.3% is unlikely. A strengthened budgetary performance will improve Murcia's intrinsic credit profile, which is currently below the IDRs.

Regional Economy in Recovery
Murcia has a weaker economic profile than Spain, with GDP per capita equivalent to 81% of the national average in 2014. Fitch expects nominal GDP to have grown close to 3% in 2015, in line with the national rate, following the recovery in 2014. Nominal GDP in 2014 was EUR27.1bn. The labour market also improved as unemployment decreased to 23.5% in 3Q15 (Spain 21.2%), from 26.6% at end-2014. The external sector has consistently improved its performance since 2011, and infrastructure transport will be complemented in 2016 with the high-speed train linking the region to Madrid.

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

KEY ASSUMPTIONS
Fitch assumes that the state will continue providing support to the Spanish regions over the medium term. Moreover, Fitch will review the rating floor if state support measures are cancelled or if there is deterioration in the central government's ability and willingness to continue providing extraordinary support to the regions (see "Q&A on the Rating Floor for Spanish Regions" dated 23 December 2015 on www.fitchratings.com).