OREANDA-NEWS. Fitch Ratings says in a new report that Spanish autonomous communities could increase current expenditure above what they have initially budgeted for 2016.

Although many autonomous communities have budgeted for a positive current balance, Fitch sees a risk that it could overall remain negative for the sector in 2016, as improvement in the economy, combined with the desire to compensate for recently undertaken austerity efforts, may result in current expenditure rising above the budget. While several autonomous communities may still achieve a positive current balance, this may not be sufficient for positive rating actions. Positively, we expect the negative current balance to be smaller than those seen since 2010.

More importantly, Fitch expects the state mechanisms supporting the autonomous communities' liquidity and refinancing needs to continue in 2016. Access to borrowing has visibly improved and we consider that maintaining such financial mechanisms as essential for some autonomous communities. The Ministry of Finance and Public Administration has allocated EUR25bn to the state mechanisms in 2016, which represents 60%-70% of debt maturities according to Fitch's base case scenario.

We expect debt to continue to grow to EUR260bn-EUR270bn at end-2016, accounting for 200%-210% of the regional governments' overall current revenue, a high level for European local and regional governments. This makes support from the central government crucial for several autonomous communities, which Fitch expects to be maintained in the medium term despite current political uncertainty. The agency will monitor the sector's operating balance/debt servicing ratio, which reflects the capacity of autonomous communities to refinance their debt from savings. This is budgeted at 38% for 2016, after having been in negative territory in the 2010-2014 period.

The 2016 draft budget projects a 7% yoy increase in autonomous communities' operating revenue, above expected GDP growth. A moderate part of this increase is due to the impact of economic recovery on the recurrent state allocation. However, an important amount of additional revenue stems from an extraordinarily high positive tax settlement from 2014. Autonomous communities will receive a sizable estimated EUR6.9bn, or 6.6% of operating revenue. Fitch considers this inflow as a one-off, which could generate fiscal imbalance if autonomous communities decide to use this funding for recurrent expenditures.

The current funding system of autonomous communities is due for revision in 2016, although this is being delayed by the political stalemate in the central government. This review would be crucial for several autonomous communities that have been reporting deep negative current balances. The revision may further include the review of fiscal policies and the responsibilities of regional governments, although we believe its impact will not materialise until next year. A new executive at the central government is pending, and may prompt changes to the current scenario.

The report, '2016 Outlook: Spanish Autonomous Communities' is available on www.fitchratings.com.