Moody’s Investors Service has today changed the outlook on the ratings of the autonomous regions of Azores and Madeira to positive from stable. At the same time, Moody’s affirmed the long-term issuer ratings of these two Portuguese sub-sovereigns.
The outlook changes reflect the expectation of reduced systemic risk as captured by the outlook change on the Ba1 Portuguese sovereign rating to positive from stable on 1 September 2017. The improving resilience of Portugal’s economic growth and ongoing fiscal improvement will also help strengthen the credit profile of both autonomous regions given the strong correlation between the Portuguese sovereign and sub-sovereign credit risk.
RATIONALE FOR THE RATING AFFIRMATIONS:
AUTONOMOUS REGION OF AZORES
Moody’s affirmation of the Ba2 long-term issuer rating of the autonomous region of Azores reflects the region’s high net direct and indirect debt levels of 255% of operating revenue in 2016, although Moody’s expects a slight improvement to be recorded in the current fiscal year. The Azores also faces ongoing budgetary challenges to address ongoing deficits. The gross operating balance, although positive, fell in 2016 as operating expenditures increased 4.7%, reflected primarily in higher healthcare spending and rising goods and services costs. Controlling expenditure increases will be crucial for the region in its efforts to return to balanced budgets.
Ba2 Rating For Azores: This is generally the highest rating assigned to a non-investment grade security or carrier. This rating signifies that the security or carrier is not creditworthy enough to be considered as an investment, and is therefore considered speculative. Investors or policy owners are taking a higher level of risk with this entity.
THE AUTONOMOUS REGION OF MADEIRA
The affirmation of the B1 long-term issuer rating of the autonomous region of Madeira reflects the region’s weak fiscal performance, sizeable commercial debt, and very high debt metrics (390% of operating revenues in 2016). To prevent default on its debt obligations, the region has benefited from central government liquidity support since 2012 through several loans and guarantees. Furthermore, the Portuguese treasury (IGCP) assumed Madeira’s debt management between 2012 and 2015. The region continues to work with the central government on a long-term plan to reduce its debt levels and commercial debt stock. Madeira also faces ongoing sizeable deficits and high financing requirements which continue to weaken its fiscal health. Moody’s notes that the region has made significant fiscal consolidation efforts and that its tax revenue collection has increased significantly in recent years due to tax rate hikes. Madeira’s tax revenues increased by 41% between 2012 and 2016, helping the region to reduce its deficit to operating revenue ratio to 10% in 2016 from 77% in 2013.