OREANDA-NEWS. Fitch Ratings has affirmed the Italian City of Rome's Long-term foreign and local currency Issuer Default Ratings (IDR) at 'BBB' and Short-term foreign currency IDR at 'F2'. The Outlook is Stable.

The affirmation reflects Rome's low direct debt and Fitch's expectations that the city will continue to be supported by the national government, raising confidence that it will strengthen and stabilise its operating performance. The ratings also factor in an expected positive margin of around 2% over the medium term, thereby covering annual debt servicing requirement for interest and principal.

KEY RATING DRIVERS
Neutral Institutional Framework
Rome benefits from ad-hoc financial support from the national government's via the 2014-2016 recovery plan to overcome the original EUR550m operating deficit, and also the Gestione Commissariale del Comune di Roma (BBB+/Stable), which took on EUR6bn of Rome's liabilities pre-dating 2008, being serviced by an annual EUR500m contribution (see Update on Gestione Commissariale del Comune di Roma, dated July 2015 at www.fitchratings.com). EUR300m of this is provided by the national government, while the city is mandated to provide EUR200m, from a personal income tax surcharge and a fee on airport passengers. The national government has also contributed to cover extra costs (mainly transportation and urban cleaning) during the Vatican Jubilee by allowing extra borrowing of EUR170m in 2015-2016.

The city remains exposed to the national deficit and debt trimming policy and is a net contributor to the municipal solidarity fund with EUR370m in 2015 (EUR350m in 2014).

Growing Revenue, Cost Control
In its central scenario (see Fitch: Prudential Rules and State Support will Keep Rome's Budget on Track dated December 2015 at www.fitchratings.com), Fitch expects Rome to have achieved a balanced operating budget in 2015. According to its recovery plan, the city remains committed to streamlining its cost structures. Fitch expects revenue to grow towards EUR5bn in the medium term, mainly driven by increasing fees on services and some minor taxes (ie tourist tax), while property and personal income tax are already at their upper legal limit, meaning there is limited fiscal leeway.

Investments will average 10% of the budget in 2015-2016 (or around EUR600m), primarily to upgrade mobility and urban cleaning related to the Vatican Jubilee. They will largely be funded by capital transfers, some asset sales, and debt resources.

Management under State Control
Until the election in spring 2016, the city is being administered by a state-appointed commissioner after the mayor stepped down in October 2015. Fitch expects Rome to proceed with a cost rationalisation policy, including a revision of tax-supported companies (first of which will be ATAC and AMA, transportation and waste collection, respectively), as well as fighting tax evasion, while strengthening tax and fees collection rate from the 80% averaged in 2014.

Low Debt, High Liabilities
Rome's debt was low at about EUR1.2bn at end-2015 and Fitch expects it to remain at a low one-third of operating revenue over the medium term (or around EUR1.4bn). However, it would increase by about 60% when including the financial debt of its main subsidiaries. Fitch expects Rome to potentially tackle liquidity pressures from a fund balance deficit (EUR850m at end-2014) following an extraordinary revision of receivables and payables in 2015, by resorting to preferential payments of financial debt, pending more conventional measures to overcome the shortfall.

Growing Economy
After a modest recovery in 2015, Fitch forecasts the city's GDP to grow 1% in 2016, mainly driven by Vatican Jubilee-related events, which will mainly result in a growing tertiary sector (tourism and commercial activities) which should help increase tourist tax revenue and maintain wealthy economic indicators over the medium term. Fitch projects the unemployment rate will slightly decrease in 2015-2016, to 10% (11% in 2014), underpinning the growing tax base and a GDP per capita around 30% above the EU-28 average.

RATING SENSITIVITIES
The ratings could be downgraded if average tax and fee collection rates fail to improve from 80%, undermining confidence in the financial management of the city's accounts. Failure to improve the operating performance or a level of debt no longer compatible with the rating could also prompt a downgrade.

Conversely, a solid and persistent growing economy, supporting a stronger fiscal performance including the overcoming of the fund balance deficit and improved collection rates, and the operating margin increasing towards 10%, could result in positive rating action.