DBRS Confirms Autonomous Region of Madeira at BB, Stable Trend

DBRS Ratings Limited (DBRS) confirmed the Autonomous Region of Madeira’s (Madeira) Long-Term Issuer Rating at BB and Short-Term Issuer Rating at R-4. The trend on all ratings remains Stable.

KEY RATING CONSIDERATIONS

Madeira’s ratings are underpinned by (1) a stabilising financial performance over the last few years and slowly improving debt metrics supported by more favourable economic indicators; (2) the financial oversight and support to the regional government from the Republic of Portugal (rated BBB, Stable, by DBRS); and (3) Madeira’s enhanced control over its indirect debt as well as commercial liabilities in the last few years through a gradual recentralisation of these liabilities onto its own balance sheet.

The Long-Term Issuer Rating is currently constrained at the BB level by Madeira’s still very high direct and indirect debt levels. This is despite DBRS’s expectation that debt metrics are likely to continue improving over the medium-term, albeit at a reduced pace. The region’s geographical location as an archipelago in the Atlantic Ocean and the government’s still large exposure to regional companies also remain key challenges to Madeira’s overall credit profile.

RATING DRIVERS

Upward rating pressure could materialise if any or a combination of the following occur: (1) positive rating action on the Portuguese sovereign rating; (2) Madeira substantially reduces its indebtedness; (3) Madeira’s economic indicators continue to improve and the region manages to further diversify its economy; or (4) there are indications of an additional strengthening of the relationship between the region and the central government.

Negative downward pressure on the ratings could materialise if any or a combination of the following occur: (1) negative rating action on the sovereign rating; (2) Madeira fails to stabilise its financial performance and debt metrics over the medium term; (3) indications emerge that the financial support and oversight currently provided by the central government weaken; or (4) a reversal in the reduction of the region’s indirect and guaranteed debt occurs.

RATING RATIONALE

Strengthening Fiscal Performance since 2013 and Slowly Declining Very High Debt Metrics

Madeira’s overall fiscal performance has substantially improved in the last five years. In particular, expenditure control and some growth in tax revenues, reflecting tax hikes and economic growth, have allowed the region to deliver a stronger financial performance. The region’s deficit represented a moderate 13% of operating revenues at the end of 2017, down from 74% at the end of 2013. While the 2013 financial performance largely reflected one-off measures with sizeable capital injections into public companies, DBRS notes that reduction in the region’s financing deficit has been slow and has required continuous efforts from the regional government.

In 2017, the moderate deterioration in the region’s financial performance compared to 2016, primarily reflected lower corporate tax income compared to the previous year, with some corporations moving some of their operations outside of the region. For 2018, Madeira’s financial performance should stabilise and DBRS positively notes that budget execution at the end of August signals further fiscal consolidation for the regional finances.

Solid gross domestic product (GDP) growth, supported by a steady rise of the tourism sector in the region and strengthened fiscal performance have allowed Madeira to decrease its extremely high debt ratios since 2012. While in an international comparison, the region’s debt-to-operating revenues at 570% at the end of 2017 remains very high, DBRS views positively the downward trend it has recorded in the last few years. However, Madeira’s debt ratios continue to represent, in DBRS’s view, the main drag on the region’s ratings.

Enhanced Oversight and Sovereign Guarantees Support the Rating

DBRS acknowledges that the region has taken substantial steps to increase transparency and monitoring around its indirect and guaranteed debt, but also to reduce its DBRS-adjusted debt stock. In addition, the national government’s support via the Portuguese Treasury and Debt Management Agency (IGCP) is a positive credit feature for the region as it strengthens its overall debt management. Nevertheless, the sustained growth in Madeira’s direct debt obligations and the very high debt stock it has accumulated over time continue to weigh considerably on the region’s ratings.

The explicit guarantees provided by the central government for the refinancing of the regional debt and DBRS’s expectation that this support will continue going forward are positive credit features supporting Madeira’s ratings. The region’s refinancing needs therefore fully benefited from the national government’s explicit guarantee in 2018 and will continue to do so in 2019. Going forward, while the region’s financial performance is expected to slowly improve, additional debt reductions will be critical for the region to strengthen its credit profile further.

RATING COMMITTEE SUMMARY

The DBRS European Sub-Sovereign Scorecard generates a result in the BB (high) – BB (low) range. The main points discussed during the Rating Committee include: the relationship between the central government and the autonomous region of Madeira, the debt metrics and financial performance of the region, the region’s economic growth and its governance.

KEY INDICATORS FOR THE REPUBLIC OF PORTUGAL

The following national key indicators were used for the sovereign rating. The Republic of Portugal’s rating was an input to the credit analysis of the Autonomous Region of Madeira.

Fiscal Balance (% GDP): -3.0 (2017); -0.7 (2018F); -0.2 (2019F)
Gross Debt (% GDP): 124.8 (2017); 122.2 (2018F); 118.4 (2019F)
Nominal GDP (EUR billions): 194.6 (2017); 200.2 (2018F); 207.0 (2019F)
GDP per Capita (EUR): 18,790 (2017); 19,376 (2018F); 20,000 (2019F)
Real GDP growth (%): 2.8 (2017); 2.3 (2018F); 2.3 (2019F)
Consumer Price Inflation (%): 1.6 (2017); 1.4 (2018F); 1.4 (2019F)
Domestic Credit (% GDP): 253.6 (2017); 250.5% (Mar-2018)
Current Account (% GDP): 0.5 (2017); 0.7 (2018F); 0.7 (2019F)
International Investment Position (% GDP): -104.9 (2017); -105.7% (Jun-2018)
Gross External Debt (% GDP): 209.4 (2017); 207.7% (Jun-2018)
Governance Indicator (percentile rank): 85.6 (2016); 87.5 (2017)
Human Development Index: 0.85 (2016); 0.85 (2017)

Notes:

All figures are in Euros (EUR) unless otherwise noted.

The principal applicable methodology is Rating European Sub-Sovereign Governments, which can be found on the DBRS website under Methodologies. The principal applicable rating policies are Commercial Paper and Short-Term Debt, and Short-Term and Long-Term Rating Relationships, which can be found on our website under Rating Scales. These can be found on www.dbrs.com at: http://www.dbrs.com/about/methodologies.

The sources of information used for this rating include the Autonomous Region of Madeira, Bank of Portugal, Instituto Nacional de Estatística (INE). DBRS considers the information available to it for the purposes of providing this rating to be of satisfactory quality.

DBRS does not audit the information it receives in connection with the rating process, and it does not and cannot independently verify that information in every instance.

Generally, the conditions that lead to the assignment of a Negative or Positive Trend are resolved within a twelve month period. DBRS’s outlooks and ratings are under regular surveillance.

For further information on DBRS historical default rates published by the European Securities and Markets Authority (“ESMA”) in a central repository, see:
http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

Ratings assigned by DBRS Ratings Limited are subject to EU and US regulations only.

Lead Analyst: Nicolas Fintzel, Vice President, Global Sovereign Ratings
Rating Committee Chair: Alan G. Reid, Group Managing Director, Global Financial Institutions Group and Sovereign Ratings
Initial Rating Date: 15 June 2018
Last Rating Date: 15 June 2018

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