OREANDA-NEWS. September 07, 2015. Fitch Ratings has affirmed the Region of Valle d'Aosta's (VdA) Long-term foreign and local currency Issuer Default Ratings (IDRs) at 'A' and Short-term foreign currency IDR at 'F1'. The Outlooks on the Long-term IDRs are Stable.

The agency has simultaneously affirmed the Long-term ratings of the region's EUR74m and EUR543m (bullet) bonds, maturing in 2026 and 2021, respectively, at 'A'.

KEY RATING DRIVERS
The affirmation reflects Fitch's expectation that the region's operating performance will remain strong, offsetting pressures from central government in the medium term. We also expect the region's direct debt will decrease and that liquidity will remain sound. The ratings also take into account the prudent management and the robust economy.

Fitch expects that despite the growing contribution to national budget consolidation, the region will maintain its operating margin at EUR200m-EUR220m in the medium term (or 15%, compared with almost EUR250m in 2014, or 18%), covering almost 4x the debt service requirements (about EUR55m in the same period). The residual budgetary flexibility and the robust balance sheet will also help maintain the region's healthy budget.

Fitch believes that the region will continue pursuing its zero-borrowing policy, allowing the debt (net of an approximately EUR400m sinking fund for the bullet bonds and of the debt at charge of the state) to decline towards EUR180m by end-2016, or 15% of operating revenue .In Fitch's base case scenario, debt will stabilise at this level in the medium term, down from EUR380m in 2010. As capital spending will consequently be reduced to EUR150m-EUR200m, regional companies may step in and complement the regional investment plan.

Due to robust tax compliance supporting collection rates, Fitch expects liquidity to hover at a healthy EUR150m-EUR200m over the medium term, matching the region's outstanding net direct debt and covering more than 3x annual debt service requirements. The fund balance surplus (EUR150m at end-2014), although declining, offers additional protection in case of unexpected liquidity pressure.

The expected mild GDP recovery in 2015 (0.5%, from -0.2% in 2014) mitigates the region's small size and tax-base concentration. GDP per capita places the region about 30% above the EU29 average and the widely spread wealth should continue supporting tax generation capacity. Tourism (employing about 25% of the local workforce) and a recovery of exports should help the unemployment rate (8.5%) remain significantly below the national average (13%).

VdA's ratings are above Italy's sovereign ratings (BBB+/Stable), as budgetary flexibility allows the region to maintain a healthy budget while coping with external pressures, including contributions to national budget consolidation of about EUR200m annually. The protection granted by its special autonomous status shields the region from the risk of unilateral interference from the state, including risks of annual budgetary appropriations.

RATING SENSITIVITIES
An upgrade of Italy would be reflected on VdA's ratings, provided that the region continues to perform in line with Fitch's expectations.

Conversely, a downgrade of Italy, a prolonged economic downturn that weakens tax generation, or a structural decline of the margin below 10% could result in a downgrade of VdA's ratings.