OREANDA-NEWS. October 13, 2015. Fitch Ratings has affirmed the Historical Territory of Bizkaia's Long-term foreign and local currency Issuer Default Ratings (IDRs) at 'A' with Stable Outlook. Fitch has also affirmed the Short-term foreign currency IDR at 'F1.

The ratings reflect the province's ability to maintain solid fiscal performance relative to its own budget and to keep debt stable. The Stable Outlook reflects that of Spain.

KEY RATING DRIVERS
Institutional framework: Bizkaia can be rated higher than the Spanish sovereign because of its financial and fiscal autonomy and the institutional recognition in the Spanish constitution, which mitigates sovereign unilateral interferences on the issuer as per Fitch's criteria. The ratings reflect Bizkaia 's special status, solid socio-economic profile, proven ability to maintain a stable and sound operating performance, and relatively low debt burden. The ratings also takes into account its prudent management and strong liquidity.

In common with the other two Basque provinces, Bizkaia has a special legal and fiscal status, which is explicitly recognised by the Spanish Constitution. Under this regime, the provinces benefit from a special tax arrangement, whereby they have wide fiscal powers, are entitled to levy and collect taxes in the province and have the authority to set rates on a number of taxes, primarily personal income tax. This gives the provinces strong fiscal flexibility and is a positive rating factor. Also, some of the fiscal receipts have to be transferred to other tiers of government as per established agreement.

Economy: Bizkaia is a wealthy province by national and international standards, with a GDP per capita estimated in 2012 at 23.2% above the Spanish average. It has an estimated population of 1.15 million, largely concentrated around its capital, Bilbao, It started contracting in 2012, in line with Spain, registering a drop of 0.6% over 2012-14. GDP was estimated at EUR32bn in 2014, and is characterised by a large manufacturing sector, representing around 16%. Other indicators illustrating Bizkaia's solid fundamentals are a high employment rate, at 46.8% in 2014 versus 45% in Spain. The number of registered workers in 2014 grew 1.4%, albeit below the national rate of 2.4%.

Fiscal Performance: The province has reported solid fiscal performance. Bizkaia has recorded a positive current balance over the past five years, with an adjusted operating margin, excluding agreed transfers, averaging 35% and is projected to remain around this level during the forecast period to 2017. The 2015 budget includes an 8.8% tax collection increase as economic activity continues to improve.

Following cost-cutting measures since 2009, the 2015 budget is forecasting a 5% increase in operating expenditure, supported by firmer economic performance. Under Fitch's base case scenario, the current balance-to-adjusted current revenue is expected to remain around 30% over 2015-2016.

Debt: Bizkaia kept debt stable at EUR1.2bn over 2009-2014, which Fitch expects to continue over the medium term. A sound fiscal performance in 2014 allowed Bizkaia to report a comfortable debt payback ratio of 2.5 years, and future debt repayments are significantly below the region's expected current balance. In addition, Bizkaia's liquidity is strong due to direct collection of tax and its available cash is sufficient to cover three years of debt amortisations.

RATING SENSITIVITIES
An improvement of the labour metrics could lead to an upgrade of the province's intrinsic credit profile and subsequently the IDRs. Operating balance not fully covering annual debt service requirements would result in a downgrade of the IDRs.

A downgrade of the sovereign would trigger a downgrade of Bizkaia's IDRs as the province is presently at the maximum leeway above the sovereign rating.