OREANDA-NEWS. The decisive win in Rome's municipal elections may help end a period of political uncertainty, Fitch Ratings says. But the new mayor faces long-standing challenges to increase revenue and to reform public sector entities (PSEs).

Virginia Raggi of the Five Star Movement (M5S) received over two-thirds of the vote on 19 June. M5S also secured a majority on Rome's City Council, winning 60% of the seats. Municipal government will now pass back to the elected administration from a commissioner appointed by Italy's Interior Ministry last November after the previous mayor, Ignazio Marino, resigned.

The clear majority in the municipal council won by Raggi and M5S will help streamline decision making, which had been complicated by political wrangling in past coalitions. We do not expect any sudden change in fiscal policy as it has been set with the aim to balance recurrent spending with recurrent revenue set out in Rome's 2014-2016 recovery plan.

However, uncertainty may arise later this year during the preparation of the 2017 budget, particularly if Italy's national government curtails revenue provision to local governments as it seeks to reduce the general government deficit. This would further hamper Rome's already limited fiscal flexibility.

Raggi has pledged to improve services, including public transport and rubbish collection. A failure to improve overall tax and fee collection rates could undermine confidence in Rome's financial management. This would be negative for the City of Rome's 'BBB'/Stable rating.

Rome's PSEs are a significant burden on the city's budget and a source of contingent liabilities. Transport provider ATAC and AMA, which handles waste collection, have labour-intensive cost structures, making it difficult to cut their cost bases.

ATAC started its restructuring in 2015 and aims to break even in 2017, although Raggi has indicated that further restructuring is possible. Dealing with AMA may prove challenging because the low waste-tax collection rate fails to cover the city's defined annual payment to the company.

We forecast debt to rise to about EUR1.5bn by 2017 from EUR1.2bn at end-2015, only about 25% of operating revenue. Debt is low partly because loans and bonds incurred prior to April 2008 (of which EUR5.5bn are outstanding) are managed separately by the Gestione Commissariale del Comune di Roma (GC), a central government agency that took over the management of old financial liabilities and assets.

Rome provides EUR200m annually towards repayment of the debt that was transferred to GC, raising the funds through a personal income tax surcharge and a fee on airport passengers. The national government provides an additional EUR300m each year.

GC may cease operations once commercial liabilities (which we estimate at EUR0.5bn still outstanding) are paid (potentially with a haircut) and old receivables are fully cashed or written off. It is unclear whether financial debt - which is due to be repaid up to 2048 at least - would then revert to Rome's balance sheet, or that of the national government. We think the latter is more likely because GC is a central government entity.

A decision on whether to keep GC operational could also be accompanied by renegotiation of Rome's annual EUR200m contribution, which could eventually free up additional budgetary resources for Rome, increasing fiscal flexibility. However, if GC draws down committed loan facilities by the end of 2016 to generate liquidity for debt servicing, its own debt could increase to a level where Rome's EUR200m contributions and the Italian central government's EUR300m contributions would be earmarked for debt repayment.