Fitch Ratings has affirmed Sicily’s Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) at ‘BBB’ with Stable Outlooks, and Short-Term Foreign Currency IDR at ‘F3’. The region’s senior unsecured debt has also been affirmed at ‘BBB’. The affirmation reflects recovering fiscal performance, ongoing budgetary discipline, as well as limited budgetary flexibility. The Stable Outlook reflects our expectation of no major changes to the region’s credit fundamentals.
KEY RATING DRIVERS Recovering Fiscal Performance Fitch expects Sicily to progressively improve its operating margin towards 3% (or EUR400m) over the medium term, from 2% in 2015 (or EUR300m) and a balanced budget in 2013-2014. The region aims to keep operating spending below EUR14bn over the medium term (as agreed with the central government) despite a rigid cost structure dominated by health care expenses, interest payments and wages (80% of total). Modest Debt Levels The region’s EUR8.2bn stock of loans and bonds at end-2015, when not including the EUR1.8bn loans granted by the central government to pay down payables, represent less than 55% of current revenue, leaving debt servicing requirements stable at 4% of revenue over the medium term. Fitch expects the operating balance to fully cover interest payments but only two-thirds of debt servicing when principal is added, although Italy’s preferential payments mechanism should ensure timely financial debt servicing. Stable Economy Ahead Sicily’s economy suffered national and regional austerity, with a modest 0.3% growth in 2015 (now at 61% of the EU-28 average). Fitch expects the local economy to start reversing the downward trend in 2016, due to capital spending sustained by EU transfers of EUR4.5bn in 2015-2020, and also due to the national government imposing less strict limitations on investment. However, without taking into account the shadow economy, the modest 0.5% GDP growth expected in 2016 is unlikely to help reduce unemployment from the current 22% (vs. national average of 12%) and sustain the 40% employment rate (57%), offering limited contribution to the growth of tax proceeds. Neutral Institutional Framework Despite its autonomous status, Sicily remains subject to contributions to Italy’s efforts to balance the country’s national accounts. On the other hand, constraints from the national government underpin regional efforts to cut spending, especially for the agreed recovery plan for the health care sector. Moreover, state loans will represent 75% of Sicily’s debt stock at end-2016, underpinning substantial support from the national government.
RATING SENSITIVITIES Failure to strengthen the operating balance towards 3% of revenue to largely cover debt-servicing requirements, and/or unexpected growth of debt towards 75% of revenue could lead to a downgrade, especially amid a sluggish economy. Conversely, positive rating action is contingent on the operating margin strengthening towards 10%, and Sicily achieving an overall balanced budget and current surplus matching principal repayment over the medium term.