OREANDA-NEWS. Fitch Ratings has affirmed the Italian Autonomous Province of Bolzano's (PAB) Long-term foreign and local currency Issuer Default Ratings (IDR) at 'A' and its Short-term foreign currency IDR at 'F1'.The Outlook is Stable.

The affirmation reflects PAB's continued strong budgetary performance, aided by its management and wealthy economy, as well as being nearly direct debt-free.

KEY RATING DRIVERS
Autonomy Underpins Ratings
Under Fitch's criteria, PAB is eligible to be rated above the sovereign by virtue of its institutional strength and high degree of financial autonomy. PAB's special autonomous status entitles it to receive fixed shares of major national taxes, ranging from 90% personal income tax (PIT) and corporate income tax (CIT) to 80% of VAT. This underpins the province's tax revenue resilience and limits dependence on state transfers. A diversified set of responsibilities supports its budgetary flexibility.

Contributions to national consolidation efforts are subject to bilateral agreements and will account for about EUR500m from 2019 to 2023, or about 0.5% of Italy's interest burden. The leeway of a maximum two notches above the sovereign's 'BBB+' rating captures possible interference by the state in case of macroeconomic stress and/or stressed sovereign finances with subsequent risks of weakening predictability of intergovernmental relations. Fitch therefore considers Italian inter-governmental relations as "Neutral" for PAB.

Strong Fiscal Performance
PAB has consistently posted strong operating performance, and Fitch expects the operating margin to range between 25%-30% over the medium term. According to preliminary data, operating revenue increased by 2% to EUR5bn at end-2015, driven by the growing tax base and steady VAT proceeds. Fitch expects it to remain around EUR5bn over the medium term and transfers to stabilise at about EUR400m. PAB's operating expenditure was EUR3.4bn in 2015, and Fitch expects it will gradually increase towards EUR3.6bn in the medium term, mainly because PAB has taken over some of the former responsibilities of the Region Trentino Alto Adige, offsetting a larger share of VAT passed to the province in 2015 (80% from 70%). However, Fitch considers these transfers of responsibilities and VAT will have a modest net effect on the operating margin. Capital spending, which accounts for less than 50% of PAB's expenditure, continues to be largely financed by non-borrowing resources, ie mainly current surpluses.

Sustainable Risks
PAB's debt policy is traditionally conservative, with direct debt amounting to a negligible EUR7m at end-2015, while debt incurred by municipalities and served by PAB decreased by about 18% to EUR415m in 2014. Overall risk slightly increased in 2015, due to guarantees growing to EUR660m from EUR412m in 2014, and EUR165m zero-interest bearing loan from the Region Trentino Alto Adige (EUR155m) and Bolzano's Chamber of Commerce (EUR10m) to be repaid in 20 years, financing specific investments. Ultimately, Fitch believes PAB's overall risk will remain at around a modest 30% of operating revenue in 2015-2017 (23% in 2014). PAB continues to have solid cash-generating capacity, supported by high tax compliance.

Sound Economy
Provincial revenue is centred on the fixed share of national taxes raised in the province, allowing PAB to take advantage of its wealthy and diversified economy. PAB's GDP per capita, at nearly 50% above the EU average, remains unmatched in Italy and makes it one of the wealthiest regions in Europe. Fitch expects PAB's GDP to continue deliver medium-term growth consistent with the 1% of 2015 and the employment rate to remain stable in the medium term at around 70%, which is well above the national level (57% in 2015), with the labour market near to full employment as the unemployment rate was only 3% at end-2015.

Prudent Management Sustaining Economy
Fitch deems PAB's management prudent and conservative, with a tight control on municipalities' and subsidiaries' debt. Fitch expects PAB's free reserves, which preliminarily accounted for EUR300m at end-2015 to be maintained at around 5% of the budget, cushioning against unforeseen events. PAB also intends to maintain a high standard of services in health care as well as strengthening the local economy by maintaining investments, which will be addressed towards fiscal facilitation and tax breaks for households and businesses to support internal demand and economic activities.

RATING SENSITIVITIES
PAB's IDRs move in parallel with those of Italy due to its standalone profile being constrained by the sovereign's rating. A rating action on the Republic of Italy would translate into a corresponding rating action on PAB.

A decline in the operating margin towards 10%-15%, due to a looser grip on spending and/or a fall in revenue could be rating negative. Mounting direct and indirect debt liabilities beyond expectations could also lead to a downgrade.