OREANDA-NEWS. Fitch Ratings has affirmed the Historical Territory of Alava's Long-term foreign and local currency Issuer Default Ratings (IDRs) at 'A' with Stable Outlook. Fitch has also affirmed the Short-term foreign currency IDR at 'F1'. The ratings on the senior unsecured outstanding bonds have been affirmed at 'A'.

The affirmation reflects Alava's strong socio-economic profile, sound fiscal performance, and to keep debt solid debt coverage. The Stable Outlook reflects that on Spain (BBB+/Stable).

KEY RATING DRIVERS
Institutional Framework
Alava can be rated higher than the Spanish sovereign because of its financial and fiscal autonomy and the institutional recognition in the Spanish constitution, which mitigates sovereign unilateral interferences on the issuer as per Fitch's criteria. The ratings reflect Alava's special status, solid socio-economic profile, proven ability to maintain a stable and sound adjusted operating performance, and solid debt coverage ratio. The ratings also take into account its prudent management and solid financial reporting.

In common with the other two Basque provinces, Alava has a special legal and fiscal status, which is explicitly recognised by the Spanish Constitution. Under this regime, the provinces benefit from a special tax arrangement, whereby they have wide fiscal powers, are entitled to levy and collect taxes in the province and have the authority to set rates on a number of taxes, primarily personal income tax. This gives the provinces strong fiscal flexibility and is a positive rating factor. Some of the fiscal receipts have to be transferred to other tiers of government as per an established agreement.

Strong Economy
Alava is a wealthy province, with a GDP per capita in 2013 at 50% above the Spanish average. Its territory has a medium population density, with 323,648 estimated inhabitants largely concentrated around its capital, Vitoria (75.4%). Alava has a higher share of elderly population than Spain, which translates into more pressure on social public services in the maintenance of residences for the elderly.

With GDP estimated at EUR10.6bn in 2013, the province had a lower setback over 2009-13 than Spain (3% vs 4%) due its lower exposure to the construction sector and a larger manufacturing sector (30% vs 12% in 2013). Alava's solid fundamentals are also demonstrated by a high employment rate, at 52.2% in 4Q15 versus 47.0% in Spain. After significant accumulated job losses of 10% between 4Q08 and 4Q13, the number of registered workers had grown 3.3% by 4Q15. This indicates that there is still room for improvement compared with the 4Q08 level.

Sound and Stable Fiscal Performance
Alava's new government has approved its first budget for 2016. Under Fitch's base case scenario, the operating balance-to-adjusted operating revenue, excluding agreed transfers, is expected to remain solid around 25%-30% over 2015-2016 (averaging 22% in 2011-2014). This is based on tax collection growth as economic activity continues to improve. Operating spending is likely to grow 3%-4% over 2015-2016 largely on social programmes, following several cuts that have been implemented since 2008 (11%).

At the last elections in May 2015, a coalition was formed between the regional right wing party Partido Nacionalista Vasco (PNV), with the support of the socialist wing party PSE-EE, after the centre-right wing party Partido Popular was in power in the last mandate. The new Deputy is Mr. Ramiro Gonzalez Vicente, and we expect continuity with a strong intention to comply with fiscal targets.

Solid Debt Coverage
Alava's estimated direct debt in 2015 is of EUR515.5m, or 4.3 years of expected current balance (EUR519.5m, or 4.9 years in 2014), and Fitch expects this to stabilise in the medium term. The debt calendar at end-2015 shows debt repayment for next three years of EUR165m, representing about 32% of outstanding estimated direct debt at end of 2015.

RATING SENSITIVITIES
An upgrade of the sovereign would be necessary condition for positive rating action on Alava's IDR as the province is presently at the maximum leeway above the sovereign rating.

A downgrade could stem from a substantial increase in direct debt, which would contribute to a substantial deterioration of direct debt servicing-to-current revenue ratio (2014: 2.6%). A downgrade of the sovereign would also trigger a downgrade of Alava's IDRs.