OREANDA-NEWS.  The financial support provided by Spain's central government to the regions so far in 2016 supports our 'BBB-' regional rating floor, Fitch Ratings says. However, changes to the support mechanism amid continued political uncertainty are creating some uncertainties over how the system will operate. This, combined with the regions' budgetary performance, will be important factors to monitor as we continue to assess the level and appropriateness of the rating floor.

The central government remains committed to providing the regions with liquidity support. Spain's interim government has amended the functioning of the main liquidity funds, the Regional Liquidity Fund (FLA) and the Supplier Fund (FFPP). Annual allocations to the funds, as seen over 2012-2015, will be replaced by quarterly allocations based on formal requests from the regions.

Quarterly allocations would be more flexible and may support central government efforts to link liquidity support to the regions' budgetary plans and performance.

In practice, however, discussions with regional authorities indicate that delays to the introduction of the new system mean they have serviced their debt directly in 2016, under the supervision of the Ministry of Finance and Public Administration (MinHap), with treasury advances made available to cover any cash shortages. We think this ad hoc system is likely to persist until a permanent central government is formed, which could take some time if fresh elections called for 26 June deliver another inconclusive result.

Political uncertainty may also delay the finalisation of broader reforms of regional funding currently under discussion, and attempts to improve enforcement of the 2012 Budgetary Stability Law (BSL). The BSL has been somewhat effective in reducing autonomous communities' current spending (which fell by 6.3% over 2012-2014), by setting a maximum fiscal deficit relative to GDP and detailing measures to correct budgetary performance if regions go off-track. For example, if the fiscal target is missed, continued access to the FLA requires an adjustment plan.

Recent announcements by Minhap requiring regions to control spending and outlining stricter enforcement of the BSL would be positive for regional fiscal performance if applied effectively. But stricter enforcement might prove challenging if it reduced the regions' ability to meet FLA conditionality. Ultimately, structural reforms that address regional complaints of underfunding are key to a lasting improvement in the regions' operating performance.
On 31 March, MinHap published preliminary 2015 accounts for the regions that showed a worse-than-expected aggregate performance.

The current balance (current revenue less current expenditure) was negative for the sixth consecutive year and at EUR11.4bn (EUR10.6bn in 2014) was equivalent to 9.0% of current revenue. This was despite a 3.7% yoy rise in current revenue. Although current revenue did not cover current spending last year, many 2016 budgets envisage a positive current balance. We forecast a negative one for 2016, as spending may grow more than regions anticipate.

The challenge of enforcing fiscal targets against this backdrop was highlighted last week, when the regions' fiscal target for 2016 was loosened slightly, to a 0.7%-of-GDP deficit.

Negative current balances increase the importance of central government debt service mechanisms for the regions. We believe the central government is willing to make liquidity available, as it has done so far in 2016. But the support mechanism's operation may become more complicated, while the regions' liquidity requirements remain high. The operational efficiency of liquidity provision will contribute to our rating floor assessment, as will the political commitment to provide liquidity to the regions.

The rating floor is currently suspended for the Autonomous Community of Catalonia.