OREANDA-NEWS. Fitch Ratings has affirmed the City of Pamplona's (Pamplona) Long-term foreign and local currency Issuer Default Ratings (IDR) at 'BBB+' with Stable Outlook. Fitch has also affirmed the Short-term foreign currency IDR at 'F2.'

The affirmation reflects Pamplona's sound operating performance and liquidity, and its moderate direct debt. The affirmation also reflects the city's strong economy. The Stable Outlook factors in our expectations of a steady operating performance and a moderate reduction of direct debt through to 2017.

KEY RATING DRIVERS
Strong Economy
Pamplona is the capital of the Autonomous Community of Navarre and the city represents a high 30.5% of the region's population or 195,853 inhabitants. Pamplona's economy is wealthy as it functions as an important administrative, political and economic centre in Navarre. Pamplona is also an important service centre in the region through its location for prestigious private health clinics and university centres, contributing to the dynamism of the local economy.

Its strong economy is demonstrated by a regional GDP per capita in 2014 that was 23.6% above the Spanish average and a higher-than-average regional employment rate at 50.7% in December 2015 (47% in Spain), despite a large share of elderly population. Job creation in the region expanded 3% yoy in December 2015.

Sound and Steady Budgetary Performance
Pamplona's steady and sound operating revenue is largely driven by significant and predictable current transfers from Navarre (44% of operating revenue) due to its special status as the capital of Navarre. Under Fitch's base case scenario, Pamplona's operating margin is expected to remain sound at 8%-9% on average for 2015-2017 (10.6% at end-2014).

Fitch expects operating expenditure to grow between 1% and 2% on average in 2015-2017, largely on social spending. For 2016, we estimate current transfers from the government of Navarre to grow 2%, in line with expected inflation.

New Government
Local elections in May 2015 saw the formation of a coalition government with majority by the left wing parties Euskal Herria-Bildu, Aranzadi, Izquierda-Ezquerra and the centrist left wing party Geroa Bai. This has resulted in a fragmented city council political composition, compared with the last single-party government by the Union del Pueblo Navarro. The new mayor Joseba Asiron intends to comply with fiscal targets.

Moderate Direct Debt
Fitch estimates direct debt in 2015 to have remained moderate at close to 51%-53% of expected current revenue or EUR93m-EUR95m, down from 55.2% or EUR102m in 2014. In 2016, Fitch's base case scenario assumes direct debt will remain moderate at close to 48%-51% of expected current revenue or EUR92m-EUR93m.

Pressure on debt servicing is moderate, in particular with EUR25.3m debt maturing over the next three years, or 27% of expected outstanding direct debt at end-2015. Pamplona's liquidity position is stable and high, representing 31% of its estimated outstanding direct debt at end- 2015, meaning that no renewal of short-term credit lines has been necessary.

RATING SENSITIVITIES
Pamplona's IDRs are constrained by the sovereign IDR and are sensitive to changes of the sovereign rating. An upgrade of the sovereign IDR would result in an upgrade of Pamplona's IDR, provided the city continues to post a sound operating performance and a moderate direct debt-to-current revenue ratio.

Even though Fitch currently considers this scenario as unlikely, Pamplona's IDR could be downgraded if debt repayment increases significantly above 55% of the city's current balance expected for 2016 and 2017 (2014: 35%), combined with the operating margin falling sharply below 5% (2014: 10.6%).