Spanish Autonomous Community of Navarre `A` Rating Affirmed

Research Update:
Spanish Autonomous Community of
Navarre 'A' Rating Affirmed; Outlook
Remains Stable
Primary Credit Analyst:
Mariamena Ruggiero, Milan (39) 02-72111-262; mariamena.ruggiero@spglobal.com
Secondary Contact:
Ines Olondriz, Madrid (34) 91-788-7202; ines.olondriz@spglobal.com
Table Of Contents
Overview
Rating Action
Rationale
Outlook
Key Statistics
Ratings Score Snapshot
Key Sovereign Statistics
Related Criteria And Research
Ratings List
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Research Update:
Spanish Autonomous Community of Navarre 'A'
Rating Affirmed; Outlook Remains Stable
Overview
• We expect that Navarre's budgetary performance will improve slightly over 20162018, with the deficit narrowing from 2016, in line with the official deficit
reduction targets.
• In our view, Navarre's high fiscal autonomy and sound financial management make it
more resilient in a stress scenario than Spain. We consequently rate Navarre two
notches higher than Spain.
• We are affirming our 'A' long-term rating on Navarre.
• The stable outlook on Navarre reflects that on Spain.
Rating Action
On May 13, 2016, S&P Global Ratings affirmed its 'A' long-term issuer credit rating
on Spain's Autonomous Community of Navarre. The outlook remains stable.
Rationale
Our long-term rating on Navarre is two notches higher than the long-term rating on
Spain (BBB+/Stable/A-2). According to our criteria for ratings above the sovereign,
a local or regional government (LRG) can be rated up to two notches higher than its
sovereign if the LRG can maintain credit characteristics that are more resilient
than the sovereign's in a stress scenario, despite high sensitivity to country risk.
We believe Navarre meets the above-mentioned conditions and therefore apply a twonotch differential to the ratings. This reflects our view of the region's:
• Export-oriented and competitive industry, focused on internationally diverse
markets, which partly mitigates its concentration in Spain's economy;
• Special constitutional status, which isolates it from negative intervention by the
sovereign;
• Financing system, with high fiscal autonomy that does not rely on transfers from
the central government to any meaningful degree. As a result, we estimate that the
impact of a sovereign stress scenario would come from a fall in GDP and tax
collection; and
• Track record of sound financial management and a strong payment culture.
We also think that Navarre could withstand a stress scenario, as defined in our
criteria, and continue to service its debt after a sovereign default. Nevertheless,
we believe that Navarre has high sensitivity to country risk.
We have maintained our assessment of Navarre's stand-alone credit profile (SACP) at
'a+'. The SACP is not a rating but an assessment of the intrinsic creditworthiness
of an LRG under the assumption that it is not constrained by the sovereign credit
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Research Update: Spanish Autonomous Community of Navarre 'A' Rating Affirmed; Outlook Remains Stable
rating. The SACP results from the combination of our assessment of an LRG's
individual credit profile and the institutional framework in which it operates.
Navarre's SACP is supported, in our opinion, by its very strong economy in an
international context, its strong financial management, strong budgetary
flexibility, and low contingent liabilities. We also take into account the evolving
but balanced institutional framework in which Navarre operates. Factors partly
constraining Navarre's SACP are Navarre's average budgetary performance, adequate
liquidity, and moderate debt burden.
Our assessment of Navarre's institutional framework reflects our view of the
region's high fiscal autonomy, which is tempered by our expectation of only limited
extraordinary support from Spain's central government if needed. Navarre--along with
Spain's other special-status entities, such as the Autonomous Community of the
Basque Country and the Historical Territory of Bizkaia--has unique taxing powers
compared with the rest of Spain's LRGs, including legislative power over personal
income and corporate taxes. Navarre collects taxes and transfers a portion of them
to Spain's central government in compensation for the services it provides in
Navarre.
Navarre does not participate in Spain's equalization system for funding regions. As
a result, it can benefit fully from the strength of its economy and resulting large
tax bases. Navarre's economy is wealthier, more competitive, and more export
oriented than Spain's, in our opinion.
We consider Navarre's economy to be very strong, in line with Spain's other specialstatus entities, such as the Basque Country and Bizkaia. We believe the economies of
such entities are broader and more diversified than others in Spain.
Navarre's budgetary flexibility is strong, due to its tax autonomy and very high GDP
per capita in a national comparison. The region's GDP per capita is one of the
highest in Spain and, in our view, Navarre could absorb potential revenue shortfalls
by increasing tax rates if needed. For instance, the new government in 2015
increased taxes to neutralize the impact of tax reductions implemented by the
previous administration.
In our opinion, Navarre's financial management is strong and aware of the region's
main external risks, in particular regarding financial relationships with the
central government. Navarre's coalition government, formed following the May 2015
elections, continues to demonstrate a strong payment culture. The financial
management team appears skilled and experienced, and accountability seems strong.
Spain's regions do not usually publish multiyear projections, but Navarre's
government intends to do so from 2017. In addition, for the first time in three
years, parliament has approved the budget as presented by the coalition government.
We consider Navarre's budgetary performance to be average. Contrary to our
expectations, the deficit after capital accounts increased to 5.9% of total revenues
in 2015, compared with 4.4% in 2014 and 3.9% in our base-case scenario. Navarre did
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Research Update: Spanish Autonomous Community of Navarre 'A' Rating Affirmed; Outlook Remains Stable
not comply with the deficit target set by the central government, due to one-time
expenditures linked mainly to transfers to the central government that we do not
expect will reoccur.
Under our base-case scenario for Navarre in 2016-2018, we forecast a slight
improvement in the operating margin to an average of 3.2% of operating revenues
compared with 2.0% in 2014 and only 0.1% in 2015. In 2016, Navarre will collect a
full year of new taxes stemming from the revision of its agreement with the central
government ("Convenio economico"), and we do not anticipate further one-time
expenditures. Over 2017 and 2018, we believe further improvements of the operating
margin will hinge essentially on higher revenue growth linked to improved economic
growth prospects for Spain and Navarre. We forecast deficits after capital accounts
of about 1.7% of total revenues over 2016-2018, compared with 5.3% in 2015 and 4.4%
in 2014, in line with the consolidation path to be agreed with the central
government because of the missed deficit target in 2015.
Navarre's debt burden is moderate, and continued deficits will increase its taxsupported debt in absolute terms. However, because we expect the region's revenues
will increase, we consider that tax-supported debt will have peaked at 111.7% of
consolidated operating revenues in 2015 and forecast that it will decrease gradually
to about 102.0% by 2018.
Navarre's contingent liabilities are low. We consolidate most of Navarre's 11
companies in our tax-supported debt calculation. Guarantees provided by financial
agency Sodena, which we exclude from tax-supported debt, represented only 3.6% of
Navarre's operating revenues in 2015 and its delinquency ratios are very low. Also,
the region's conflict with the central government on value-added tax returns arising
from Volkswagen's car exports in 2007-2011 has been resolved without a material
impact on Navarre's financial position.
Outlook
The stable outlook on Navarre reflects that on Spain.
With Navarre's SACP currently at 'a+' and given our view of the region's credit
strengths, we do not see a realistic scenario under which Navarre's SACP would
weaken to 'a-' or lower, which would lead to a downgrade.
We could downgrade Navarre if we believed that it no longer met our conditions to be
rated above the sovereign. However, we consider this scenario to be highly unlikely.
We would also downgrade Navarre if we downgraded Spain, given that we believe
Navarre can be rated only up to two notches above Spain, in line with our criteria.
We would upgrade Navarre by one notch if we upgraded Spain by one notch and the
region continued to perform in line with our current base case, all other factors
remaining unchanged.
Key Statistics
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Research Update: Spanish Autonomous Community of Navarre 'A' Rating Affirmed; Outlook Remains Stable
Table 1
Autonomous Community of Navarre Financial Statistics
--Fiscal year end Dec. 31--
(Mil. €)
2013
2014
2015
2016bc
2017bc
2018bc
Operating revenues
3,140.4
3,200.1
3,283.4
3,413.3
3,550.0
3,711.1
Operating expenditures
3,114.0
3,136.0
3,280.5
3,322.1
3,439.2
3,573.9
26.4
64.1
3.0
91.1
110.8
137.3
0.8
2.0
0.1
2.7
3.1
3.7
46.6
89.2
76.0
60.7
63.1
66.0
Operating balance
Operating balance (% of operating revenues)
Capital revenues
Capital expenditures
290.5
296.9
256.1
231.3
238.2
245.4
(217.5)
(143.6)
(177.1)
(79.5)
(64.3)
(42.1)
(6.8)
(4.4)
(5.3)
(2.3)
(1.8)
(1.1)
Debt repaid
193.2
296.5
307.2
415.2
293.0
255.0
Gross borrowings
463.7
492.6
446.9
494.7
357.3
297.1
52.9
52.4
(37.4)
(0.0)
0.0
0.0
Balance after borrowings (% of total revenues)
1.7
1.6
(1.1)
(0.0)
0.0
0.0
Modifiable revenues (% of operating revenues)
50.8
50.3
50.0
50.0
50.0
50.0
Capital expenditures (% of total expenditures)
8.5
8.6
7.2
6.5
6.5
6.4
2,471.9
2,684.0
2,981.8
3,061.2
3,125.5
3,167.7
78.7
83.9
90.8
89.7
88.0
85.4
3,371.5
3,458.7
3,722.7
3,764.2
3,794.1
3,801.2
105.7
106.5
111.7
109.2
105.8
101.4
Interest (% of operating revenues)
3.4
3.3
3.3
3.1
3.1
3.0
Debt service (% of operating revenues)
9.6
12.5
12.7
15.2
11.3
9.9
Balance after capital accounts
Balance after capital accounts (% of total revenues)
Balance after borrowings
Direct debt (outstanding at year-end)
Direct debt (% of operating revenues)
Tax-supported debt
Tax-supported debt (% of consolidated operating revenues)
The data and ratios above result in part from S&P Global Ratings' own calculations, drawing on national as well as international sources, reflecting
S&P Global Ratings' independent view on the timeliness, coverage, accuracy, credibility, and usability of available information. The main sources
are the financial statements and budgets, as provided by the issuer. bc--Base case reflects S&P Global Ratings' expectations of the most likely
scenario.
Table 2
Autonomous Community of Navarre Economic Statistics
--Fiscal year end Dec. 31--
2010
2011
2012
2013
2014
2015
635.0
638.6
639.4
637.0
636.0
636.1
Population growth (%)
0.8
0.6
0.1
(0.4)
(0.2)
0
Nominal GDP (mil. €)
18,257
18,221
17,543
17,454
17,623
18,246
GDP per capita (€)
28,752
28,533
27,437
27,399
27,709
28,682
0.4
0
(3.4)
(1.4)
(1.6)
(2.9)
Population as of July 1 (000's)
GDP (real) growth (%)
The data and ratios above result in part from S&P Global Ratings' own calculations, drawing on national as well as international sources, reflecting
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Research Update: Spanish Autonomous Community of Navarre 'A' Rating Affirmed; Outlook Remains Stable
S&P Global Ratings' independent view on the timeliness, coverage, accuracy, credibility, and usability of available information. Sources typically
include national statistical offices and Eurostat.
Ratings Score Snapshot
Table 3
Autonomous Community of Navarre Ratings Score Snapshot
Key rating factors
Institutional framework
Evolving but balanced
Economy
Very strong
Financial management
Strong
Budgetary flexibility
Strong
Budgetary performance
Average
Liquidity
Adequate
Debt burden
Moderate
Contingent liabilities
Low
*S&P Global Ratings bases its ratings on local and regional governments on eight main rating factors listed in the table above. Section A of S&P
Global Ratings' "Methodology For Rating Non-U.S. Local And Regional Governments," published on June 30, 2014, summarizes how the eight
factors are combined to derive the rating.
Key Sovereign Statistics
Sovereign Risk Indicators, May 3, 2016. An interactive version is available at
www.spratings.com/sri.
Related Criteria And Research
• Criteria - Governments - International Public Finance: Methodology: Rating NonU.S. Local And Regional Governments Higher Than The Sovereign - December 15, 2014
Related Criteria
• Criteria - Governments - International Public Finance: Methodology For Rating NonU.S. Local And Regional Governments - June 30, 2014
• General Criteria: Ratings Above The Sovereign--Corporate And Government Ratings:
Methodology And Assumptions - November 19, 2013
• Criteria - Governments - International Public Finance: Methodology And Assumptions
For Analyzing The Liquidity Of Non-U.S. Local And Regional Governments And Related
Entities And For Rating Their Commercial Paper Programs - October 15, 2009
• General Criteria: Use Of CreditWatch And Outlooks - September 14, 2009
• Sovereign Risk Indicators, May 3, 2015. An interactive version is available at
www.sprating.com/sri.
Related Research
• Kingdom of Spain 'BBB+/A-2' Ratings Affirmed, Despite Political Uncertainty And
Budgetary Challenge; Outlook Stable, April 1, 2016
• Spain's Autonomous Community of Navarre 'A-' Rating Affirmed, Outlook Remains
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Research Update: Spanish Autonomous Community of Navarre 'A' Rating Affirmed; Outlook Remains Stable
Stable, June 12, 2015
• Default, Transition, and Recovery: 2014 Annual International Public Finance
Default Study And Rating Transitions, June 8, 2015
• Institutional Framework Assessments For Non-U.S. Local And Regional Governments,
Feb. 5, 2015
In accordance with our relevant policies and procedures, the Rating Committee was
composed of analysts that are qualified to vote in the committee, with sufficient
experience to convey the appropriate level of knowledge and understanding of the
methodology applicable (see 'Related Criteria And Research'). At the onset of the
committee, the chair confirmed that the information provided to the Rating Committee
by the primary analyst had been distributed in a timely manner and was sufficient
for Committee members to make an informed decision.
After the primary analyst gave opening remarks and explained the recommendation, the
Committee discussed key rating factors and critical issues in accordance with the
relevant criteria. Qualitative and quantitative risk factors were considered and
discussed, looking at track-record and forecasts.
The committee's assessment of the key rating factors is reflected in the Ratings
Score Snapshot above.
The chair ensured every voting member was given the opportunity to articulate
his/her opinion. The chair or designee reviewed the draft report to ensure
consistency with the Committee decision. The views and the decision of the rating
committee are summarized in the above rationale and outlook. The weighting of all
rating factors is described in the methodology used in this rating action (see
'Related Criteria and Research').
Ratings List
Rating
To
From
A/Stable/--
A/Stable/--
A
A
Navarre (Autonomous Community of)
Issuer Credit Rating
Foreign and Local Currency
Senior Unsecured
Local Currency
Certain terms used in this report, particularly certain adjectives used to express
our view on rating relevant factors, have specific meanings ascribed to them in our
criteria, and should therefore be read in conjunction with such criteria. Please see
Ratings Criteria at www.standardandpoors.com for further information. Complete
ratings information is available to subscribers of RatingsDirect at
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Research Update: Spanish Autonomous Community of Navarre 'A' Rating Affirmed; Outlook Remains Stable
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