Fitch Affirms Catalonia at 'BB'; Outlook Negative
OREANDA-NEWS. Fitch Ratings has affirmed the Autonomous Community of Catalonia's (Catalonia) Long-term foreign and local currency Issuer Default Ratings (IDRs) at 'BB' with Negative Outlooks. Fitch has also affirmed the Short-term foreign currency IDR at 'B'. The ratings on the senior unsecured outstanding bonds have been affirmed at 'BB'.
KEY RATING DRIVERS
The political uncertainty in the region continues, notably regarding relations with the central government. Fitch assumes the Regional Liquidity Fund (FLA) will be covering Catalonia's debt obligations in 2016. The Negative Outlook reflects the potential outcome either from an abrupt separation from Spain or the withdrawal of the state liquidity support, the growing liquidity risk, as well as Catalonia's weak performance and growing debt.
Political Tensions Ongoing
The relationship between the central government and Catalonia has deteriorated after the regional parliament passed a resolution to formally start the process for independence from the rest of Spain on November 2015. The Constitutional Court subsequently suspended the resolution under request from the central government. A new government was formed in January 2016 with the statement of pushing for independence, which in Fitch's view will lead to further confrontation between the Catalan and the central governments as well as with the Constitutional Court.
Debt Redemption Supported
Fitch is monitoring the central government's assistance in assuming Catalonia's long-term debt redemptions of EUR5,921m in 2016 through the FLA, and will take rating action if this supports weakens. This includes EUR2,863m from state mechanisms, and Fitch assumes timeliness and willingness in the servicing of these obligations. The region will also redeem EUR4,627m in short-term debt in 2016, which will be rolled-over by Catalonia with the knowledge of the Ministry of Finance and Public Administration (MinHap). Fitch believes this monitoring, and the fact FLA may be a last resort to cover these maturities, mitigates the liquidity risks.
Catalonia borrowed EUR11.7bn from the FLA in 2015, including a EUR3bn extraordinary instalment in December. Its FLA needs are estimated as at least EUR7.5bn for 2016, making Catalonia the major recipient of state mechanisms. Fitch acknowledges the central government has wide powers to intervene in the affairs of the Catalan government. It includes the withholding of both ordinary funds and extraordinary liquidity support, and the suspension of the regional autonomy under article 155 of the Spanish Constitution and direct central government control.
Weak Performance, but potential improvement
Catalonia's budgetary performance has been weak for a number of years, with negative current balances since 2009. November preliminary results from the MinHap showed Catalonia breached the 0.7% fiscal deficit goal in 2015, and Fitch expects it will hover around 2.5%-3.0% at year-end. The deficit before debt is expected at close to EUR5bn to, or 25% of total revenue.
The region recently rolled-over the 2015 budget, impeding expenditures from increasing in 2016. Thanks to the strengthened revenues from the funding system in 2016 (EUR1.9bn), higher expected collection of self-collected taxes, and interest expenses lowered by EUR1bn after the restructuration of the state mechanisms, Catalonia has a margin for budgetary improvement. In our base case scenario, the current margin could improve to minus 7.0% in 2016 from minus 17.9% in 2014.
Total debt grew to EUR62bn in 2015 from EUR55.4bn in 2014, equivalent to 311% of current revenues. Approximately 70% is held by the central government under state mechanisms. However, debt growth is expected to abate on the back of higher revenues in 2016, so Fitch expects debt to account for about 300%-305% of current revenue at end-2016.
Regional Economy Growing
Catalonia has an above-average economic profile, and is recovering more quickly than the national economy. GDP grew 1.3% against 0.9% nationally in 2014, and preliminary data for 2015 indicate Catalonia was among the top Spanish regions in GDP growth, surpassing 3% in nominal terms. At this stage, Fitch assumes the process of independence will not disrupt economic activity.
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