OREANDA-NEWS. Fitch Ratings has affirmed the Italian Region of Sicily's Long-term foreign and local currency Issuer Default Ratings (IDRs) at 'BBB' with Stable Outlooks, and its Short-term foreign currency IDR at 'F3'. The Long-term ratings on the region's senior unsecured bonds have also been affirmed at 'BBB'.

The affirmation reflects Fitch's expectation that Sicily will progress towards a stronger operating balance in 2015-2017 with debt burden remaining at around 50% of revenues. The ratings also take into account some contraction in the region's economy as a result of austerity measures at both the national and regional level.

KEY RATING DRIVERS
Resurging Fiscal Performance
Fitch expects that Sicily will post an operating margin progressively strengthening towards 3% in the medium term from an overall balance in 2013-2014. Fitch continues to believe that the region will keep operating spending below EUR14bn in the medium term (a level agreed with central government to avert any possible cut shares of national taxes devolved to the region) despite quite a rigid cost structure, dominated by health care expenses, interest paid and wages (80% of total).

Debt Mitigated by Growing Subsidised Loan
The estimated EUR8.1bn stock of loans and bonds at end-2015, including the loans granted by the central government to pay down payables, represented less than 60% of current revenue and are commensurate with the rating. Thanks to favourable conditions (amortising structures and long-term maturities of state-subsidised loans), debt servicing requirements will remain modest at 4% of revenue in the medium term. Fitch expects the operating balance to fully cover interest but only two-thirds of debt servicing when principal is added, although preferential payments underpin timely financial debt servicing.

Stable Economy Ahead
Sicily's economy suffered national and regional austerity, with a 13% real GDP reduction in 2008-2014 and modest 0.3% growth in 2015 (now at 61% of the EU-28 average), as also demonstrated by the reduction of cash capex to EUR1.5bn in 2014 from an average of EUR2.8bn in 2007-2013. Fitch expects the local economy to consolidate and reverse the downwards trend, partly banking on capital spending sustained by EU transfers for EUR4.5bn in 2015-2020, and also due to the national government imposing less strict limitations on investment. However, even 1% growth in 2016 is unlikely to help reduce unemployment from the current 22% (vs. national average of 12%) and further sustain the 40% employment rate (57%), offering limited contribution to growth of tax proceeds.

Neutral Institutional Framework
The region remains subject to contribution to Italy's efforts to balance the national accounts. On the other hand, constraints from the national government underpin regional efforts to cut spending. Moreover, state loans will represent 75% of Sicily's debt stock at the end of 2015/2016, underpinning substantial support from the national government.

RATING SENSITIVITIES
Failure to strengthen the operating balance towards 3% of revenue to largely cover debt-servicing requirements, and/or unexpected growth of debt towards 75% of revenue could lead to a downgrade, especially amid continued economic sluggishness.

Conversely, positive rating action is contingent upon the operating margin strengthening towards 10%, and Sicily achieving a balanced overall budget and current surplus matching principal repayment over the medium term.