OREANDA-NEWS. Fitch Ratings has affirmed the Autonomous Community of Murcia's Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) at 'BBB-' with Stable Outlooks. Fitch has also affirmed the Short-Term Foreign Currency IDR at 'F3'. The ratings on the senior unsecured outstanding bonds have been affirmed at 'BBB-'.

The affirmation reflects the unchanged rating floor being applied to Spanish autonomous communities, including Murcia. This supports the 'BBB-' rating, which is stronger than the region's intrinsic credit profile. Fitch will monitor the ongoing debate regarding liquidity support from the central government to Spanish regions.

KEY RATING DRIVERS

Murcia's ratings are supported by the 'BBB-' rating floor for Spanish autonomous communities. The rating floor is based on a number of supporting factors that contribute to improving a region's liquidity and reducing the likelihood of default. These include the absolute priority of debt servicing by law as per article 135 of the Spanish Constitution; access to state liquidity mechanisms such as the Regional Liquidity Fund (FLA) and the Financial Facility Fund (FFF), and the budgetary stability law (BSL), which enforces fiscal discipline on local and regional governments (LRGs).

Central Government Support

We expect the region to hold EUR6.6bn in debt from state liquidity mechanisms at end-2016, close to 80% of its total debt, illustrating strong support from the central government. This includes the FLA, which was established in 2012 by the central government to support Spanish regions facing difficulties in accessing capital markets, and the Supplier's Fund (FFPP), a mechanism to help regions pay their arrears to suppliers. Debt contracted under these mechanisms is repaid evenly over 10 years.

Under Fitch's base case scenario, Murcia's funding needs of EUR1.2bn in 2016 are reliant on being financed by the FLA. Such access to state support will continue to ensure timely debt servicing, as the region faces high redemptions over the next three years, which at end-2015 exceeded 30% of outstanding debt. In 2016 support from FLA was delayed by the implementation of reinforced monitoring and fiscal discipline from the Ministry of Finance and Public Administration (MinHap) over Spanish regions. The FLA instalments are now made on a quarterly basis, rather than annually, at formal requests from the regions, increasing MinHap's control over regions' fiscal performance.

Weak Budgetary Performance

Negative current balances since 2010 and high debt levels mean that the standalone credit metrics of Murcia are weaker than its ratings indicate. The region's 2015 preliminary results showed a negative current margin of 4.6%, which was better than the negative 8.43% posted in 2014, and above Fitch's expectations. However, Murcia posted a preliminary fiscal deficit of 2.52%, breaching its 0.7% target, due to Murcia Health Service's (SMS) structural deficit, which exceeded EUR400m in 2013 and 2014.

The SMS deficit is reported off balance sheet and extraordinary transfers to SMS to cover the deficit are recorded as receivables on Murcia's account, although they will not ultimately be refunded.

Expected Improvement in 2016

Fitch expects fiscal performance to improve in 2016, due to additional EUR350m inflows stemming from higher funding allocations as well as restraint on operating expenditure. Expected improvement in fiscal performance will slow down debt increase, and expected higher operating revenues may reduce the debt-to-current revenue ratio in 2016, from 215% in 2015.

The 2016 budget forecasts operating expenditure to grow 5.9% yoy, after a 14.8% decline over 2010-2015. This spending increase is mostly allocated to healthcare, which will shrink the deficit of the SMS. Fitch believes Murcia is unlikely to meet the fiscal deficit goal of 0.7% in 2016, despite MinHap's stricter enforcement of the BSL. We estimate the current margin will improve to close to zero in 2016.

Regional Economy in Recovery

Murcia has a weaker economic profile than Spain, with GDP per capita equivalent to 81% of the national average in 2015. Fitch expects nominal GDP to grow nearly 3% in 2016, in line with the national rate, after 3.5% in 2015. The labour market has also improved as unemployment decreased to 24.6% in 2015 (Spain 22%), from 26.6% in 2014, and the number of registered workers increased 4.3%, above the national rate of 3.2%. The region has a favourable demographic structure, with the second highest population aged below 65 years in Spain.

RATING SENSITIVITIES

As Murcia's IDRs are supported by the 'BBB-' rating floor for Spanish autonomous communities, they would likely be downgraded if the floor is removed.

KEY ASSUMPTIONS

Fitch assumes that the state will continue providing support to Spanish regions over the medium term. Moreover, Fitch will review the rating floor if state support measures are withdrawn or if the central government's ability and willingness to continue providing extraordinary support to the regions deteriorates. Fitch also assumes that national economic growth will translate into enhanced funding resources from the central government to regional governments from 2017.