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Rating action

Scope Ratings GmbH (Scope) has affirmed and published the long-term issuer and senior unsecured debt ratings of the Autonomous Community of Madrid (Madrid) in both local and foreign currencies at A, with Stable Outlooks. Scope has also affirmed the short-term issuer rating of S-1 in both local and foreign currency, with Stable Outlooks.

The affirmation of Madrid’s A rating reflects:

• A well-integrated institutional framework for Spanish ordinary-status regions: The framework provides a financial safety net during periods of strain and robust intergovernmental coordination. Shared tax revenues and fiscal equalisation systems ensure regions have the resources needed to manage their responsibilities, though these mechanisms also limit fiscal autonomy. Scope’s evaluation of the framework places Spanish ordinary-status regions within an indicative rating range spanning from A to BBB. This assessment reflects their strong integration with the Spanish sovereign (A/Stable).
   
• A strong individual credit profile. The Community of Madrid demonstrates strong fiscal management and resilient budget performance. It also benefits from robust market access and secures favourable financing conditions. The region’s diversified and wealthy economy, with a GDP per capita 37% above the national average, adds further stability, driven by high-value sectors and significant foreign direct investment. Challenges include a high debt burden compared to peers, despite recent improvements, and limited budgetary flexibility.

Key rating drivers

Strong intergovernmental integration with the Spanish State. Spanish ordinary-status regions, including the Community of Madrid, benefit from a mature and supportive institutional framework characterised by strong fiscal integration and support mechanisms, though they limit regional fiscal autonomy.

Centralised funding facilities, such as the Fondo de Liquidez Autonómica (FLA), serve as backstop facilities during periods of financial strain. By the end of 2024, around 60% of the debt held by Spanish regions will be managed through these mechanisms. Although Madrid resorted only marginally to these mechanisms during the European debt crisis, other sovereign support measures, such as pre-financing of tax revenues and healthcare funding during the Covid-19 pandemic, underscore the safety net provided by the national government.

Scope’s assessment of the institutional framework for Spanish ordinary status regions captures the deep integration with the central government and thus limits ratings to within three notches below the sovereign (A/Stable). Recent national negotiations, including a 2023 agreement involving partial central government absorption of regional debt, underscore continued strong sovereign support for regions. While details remain unclear, this policy could positively impact regional debt metrics and reaffirm the stability and support of Spain's intergovernmental system. However, the increased role of bilateral negotiations for regional fiscal issues weighs on its long-term predictability.

Madrid’s strong individual credit profile relative to peers. The Community of Madrid's credit profile is bolstered by its robust budgetary performance, strong market access and favourable debt profile, and a wealthy and diversified economy. An elevated debt burden, despite recent improvements, and limited budgetary flexibility are challenges.

Robust budgetary performance. The operating balance-to-operating revenue ratio improved significantly from 2.1% in 2016 to 11.9% in 2020, reflecting strong fiscal performance, before turning negative in 2022 (-2.4%, against a sector aggregate of -2.1%) due to pandemic pressures and recovering to 2.6% in 2023 (1pp above the sector aggregate). Madrid's long-term budgetary performance demonstrates resilience, with operating revenue growth slightly outpacing operating expenditure growth. This indicates effective fiscal discipline, as the region has managed to align expenditure with its robust revenue base, even amid challenges like the pandemic.

The balance before debt movement-to-total revenue ratio rose from -6.0% in 2016 to 6.6% in 2021 but shifted to deficits of -5.1% in 2022 and -4.9% in 2023, broadly in line with the peer average, reflecting sector-wide cost pressures and the lagged impact of the health crisis on the regional financing system. Meanwhile, the capital expenditure-to-total expenditure ratio, steady at around 4% for years, rose to 6.9% in 2023 (all the while remaining below a peer aggregate of 10.4%), indicating increased investment in infrastructure and public services, supported by EU funding and revenue recovery.

Madrid has recorded high RRF-driven capital spending, with around 40% of allocated funds utilised by 2023, creating variability in budgetary outcomes due to the timing of revenue and expenditure recognition. However, gradual fiscal consolidation enhances budgetary performance, enabling the region to maintain operating surpluses and strengthen its fiscal sustainability. Scope expects Madrid's fiscal performance to stabilize, with moderate improvements in operating balances supported by recovering revenues and continued investment in infrastructure, though expenditure pressures in key sectors like healthcare and social services may constrain further progress relative to regional peers.

Strong market access and favourable debt profile. Compared to other Spanish regions, Madrid has demonstrated exceptional market access. The region displays very limited reliance on sovereign on-lending mechanisms, having repaid the entirety of the debt owed to the central government by 2020. Madrid benefits from favourable financing conditions despite its high financing autonomy and has proven its ability to access capital markets directly with a moderate interest rate spread vis-à-vis the sovereign despite a tight funding environment.

Interest payments as a share of operating revenue declined steadily from 4.7% in 2016 to 3.2% in 2023, while the implicit interest rate remained low, increasing only slightly to 2.3% in October 2024 (from 1.9% in 2022). These figures underscore Madrid’s ability to secure favourable financing conditions. Debt affordability and funding flexibility is further anchored by Madrid’s favourable debt structure, as reflected in the absence of exposure to foreign currency risk, a marginal share of variable rate liabilities (5.5% of total at end-2023), its long average maturity (8.1 years as of October 2024) and smooth refinancing profile.

Madrid's liquidity position remains robust despite a reduction in cash reserves in 2023 due to accelerated RRF investments, supported by EUR 1.8bn in credit lines, a EUR 1bn commercial paper programme, and substantial undisbursed loans with the European Investment Bank (AAA/Stable). Additionally, Madrid reduced the average payment period of its commercial bills over past years, reflecting strong governance and effective liquidity management.

Wealthy and diversified local economy. Regional GDP per capita stood at EUR 38,400 in 2022, around 37pp above the national average. This in part reflects a high share of high value-added sectors, including business and financial services, alongside strengths in key manufacturing sectors (including aerospace and pharmaceuticals). The region’s competitiveness is further reflected in the sizable inflows of foreign direct investment (FDI), which amount to more than half of total Spanish inward FDI flows, and in international rankings, including the highest ranking among Spanish autonomous communities in the 2022 EU Regional Competitiveness Index.

Despite these strengths, Madrid faces two key challenges:

A still elevated debt burden, despite recent improvements in indebtedness metrics. The debt-to-operating revenue ratio fell from 186.6% in 2016 to 149.7% in 2023, edging slightly below the sector average and highlighting effective debt reduction and prudent fiscal management. Madrid has also made significant progress in reducing its interest payment burden, with interest payments as a share of operating revenue falling from 4.7% in 2016 to 3.2% in 2023. This reflects the region's ability to secure favourable financing terms and effectively manage its debt structure. Continued fiscal discipline, further improvements in the operating balance and strategic debt management will be crucial to ensure Madrid’s long-term financial sustainability and resilience against potential economic shocks.

Limited budgetary flexibility due to a high share of rigid spending items curb the region’s ability to adjust to shocks. A significant portion of Madrid's budget is allocated to non-cyclical mandatory spending items, particularly to its substantial expenditure responsibilities in healthcare, education, and social care. These areas, including staff costs for nationally determined wages, are essential but offer limited flexibility for budget adjustments in response to economic shocks. Conversely, Madrid retains some revenue flexibility with self-collected taxes, as there are no legal caps. However, while the region's robust socio-economic profile provides some capacity for potential tax increases, the region's position as the largest net contributor to the national tax revenue equalization mechanism implies that a substantial share of its fiscal capacity is directed toward funding the regional financing system, reducing the potential direct gains from tax increases.

Outlook and rating sensitivities

The Stable Outlook reflects Scope’s view that risks to the ratings are balanced over the coming 12 to 18 months.

Upside scenarios for the ratings and Outlooks are (individually or collectively):

1. The Kingdom of Spain’s ratings/Outlooks were upgraded.
    
2. Reforms to the institutional framework resulted in significantly higher budgetary autonomy and flexibility.

Downside scenarios for the rating and Outlooks are (individually or collectively):

1. The Kingdom of Spain’s ratings/Outlooks were downgraded.
    
2. Reforms to the institutional framework materially weakened regions’ integration in institutional arrangements.
    
3. Madrid’s individual credit profile weakened significantly.

Qualitative Scorecards (QS1, QS2)

Scope’s institutional framework assessment determines the intergovernmental integration between sub-sovereigns and their rating anchor, which is the sovereign or a higher-tier government. To perform this assessment, Scope applies the Institutional Framework scorecard (QS1), centred on six analytical components: i) extraordinary support and bailout practices; ii) ordinary budgetary support and fiscal equalisation; iii) funding practices; iv) fiscal rules and oversight; v) revenue and spending powers; and vi) political coherence and multilevel governance.

Scope considers the institutional framework under which the Spanish ordinary status regions operate to display ‘full’ integration for extraordinary support and bailout practices; ‘strong’ integration for ordinary budgetary support and fiscal equalisation, fiscal rules and oversight, revenue and spending powers and funding practices. The institutional framework displays ‘medium’ integration for political coherence and multilevel governance. Consequently, Scope's assessment of the institutional framework establishes an indicative minimum rating of ‘bbb’ for Spanish autonomous communities operating under the 'ordinary financing regime'.

Furthermore, Scope assesses the individual credit profile based on quantitative and qualitative analysis of four risk categories: i) debt and liquidity; ii) budget; iii) economy; and iv) governance. These are further complemented by additional adjustments for environmental and social factors & resilience.

The outcome of these assessments, as reflected in the application of the Individual Credit Profile scorecard (QS2), is an individual credit profile score for Madrid of 85 out of 100.

The mapping of this score to the range defined by the Institutional Framework assessment results in an indicative rating of ‘a’ for Madrid.

The review of potential exceptional circumstances that cannot be captured by the Institutional Framework and Individual Credit Profile scorecards did not lead to further adjustments to Madrid’s indicative rating.

As such, the final rating corresponds to the indicative rating of A.

For further details, please see the associated rating report.

Environment, social and governance (ESG) factors

ESG factors material to Madrid’s credit quality are captured by Scope’s rating approach through several analytical areas.

Governance factors are key to Madrid’s credit profile, reflected in both the institutional framework and individual credit assessments. The institutional framework rates governance as ‘strong integration’, highlighting a robust fiscal framework with deficit and expenditure limits and central government oversight, including fiscal targets and debt approvals. Political coherence is assessed as ‘medium integration’, acknowledging regional influence in national policymaking and ongoing tensions with the central government. Madrid’s individual credit profile rates governance as ‘stronger’, reflecting prudent debt and liquidity management and a commitment to fiscal consolidation.

Social factors are captured under Scope’s assessment of Madrid’s ‘economic sustainability’. Key indicators include demographics and labour market performance, whereby Madrid’s unemployment rate improved significantly from 14.6% in 2016 to 9.7% in 2023, outperforming the national average of 11.8%. Conversely, Madrid’s working-age population declined by 1.2% annually on average over the five years to 2023, contrasting with a 0.5% annual growth for its peers.

Finally, Scope recognizes that environmental and additional social factors can influence sub-sovereign creditworthiness beyond the primary analytical areas. For Madrid, these factors are considered immaterial for any further adjustment to the credit profile, as they are already adequately captured under other aspects of the methodology.

The recent floods that severely affected the region of Valencia underscored the varying levels of vulnerability to environmental risks across Spain's regions. Notably, Madrid was unaffected by these floods due to several factors that distinguish its geographical and infrastructural profile: Madrid is located inland at a high altitude on the central plateau of Spain, making it less prone to severe flooding compared to coastal regions. Additionally, Madrid has invested in robust urban planning and drainage infrastructure to manage water flow. This includes an extensive network of stormwater management systems designed to handle periodic heavy rains, reducing the likelihood of significant flooding impacts within the region.
 
Rating committee
The main points discussed by the rating committee were: i) institutional framework for Spanish regions, ii) individual credit profile including debt, budget, economy, ESG components; and iii) peers comparison.

Methodology
The methodology used for these Credit Ratings and/or Outlooks, (Sub-Sovereigns Rating Methodology, 11 October 2024), is available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
Information on the meaning of each Credit Rating category, including definitions of default, recoveries, Outlooks and Under Review, can be viewed in ‘Rating Definitions – Credit Ratings, Ancillary and Other Services’, published on https://www.scoperatings.com/governance-and-policies/rating-governance/definitions-and-scales. Historical default rates of the entities rated by Scope Ratings can be viewed in the Credit Rating performance report at https://scoperatings.com/governance-and-policies/regulatory/eu-regulation. Also refer to the central platform (CEREP) of the European Securities and Markets Authority (ESMA): http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. A comprehensive clarification of Scope Ratings’ definitions of default and Credit Rating notations can be found at https://www.scoperatings.com/governance-and-policies/rating-governance/definitions-and-scales. Guidance and information on how environmental, social or governance factors (ESG factors) are incorporated into the Credit Rating can be found in the respective sections of the methodologies or guidance documents provided on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
The Outlook indicates the most likely direction of the Credit Ratings if the Credit Ratings were to change within the next 12 to 18 months.

Solicitation, key sources and quality of information
The Rated Entity and/or its Related Third Parties participated in the Credit Rating process
The following substantially material sources of information were used to prepare the Credit Ratings: public domain and the Rated Entity.
Scope Ratings considers the quality of information available to Scope Ratings on the Rated Entity or instrument to be satisfactory. The information and data supporting these Credit Ratings originate from sources Scope Ratings considers to be reliable and accurate. Scope Ratings does not, however, independently verify the reliability and accuracy of the information and data.
Prior to the issuance of the Credit Rating action, the Rated Entity was given the opportunity to review the Credit Ratings and/or Outlooks and the principal grounds on which the Credit Ratings and/or Outlooks are based. Following that review, the Credit Ratings and/or Outlooks were not amended before being issued.

Regulatory disclosures
These Credit Ratings and/or Outlooks are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings and/or Outlooks are UK-endorsed.
Lead analyst: Jakob Suwalski, Senior Director
Person responsible for approval of the Credit Ratings: Alvise Lennkh-Yunus, Managing Director
The Credit Ratings/Outlooks were first released by Scope Ratings on 21 September 2018. The Credit Ratings/Outlooks were last updated on 20 September 2024.
As a "sovereign rating" (as defined in EU CRA Regulation 1060/2009 "EU CRA Regulation"), the ratings on Madrid are subject to certain publication restrictions set out in Art 8a of the EU CRA Regulation, including publication in accordance with a pre-established calendar (see "Publication Calendar 2024 Sovereign, Sub-Sovereign and Supranational Ratings" published on 19 February 2024 on www.scoperatings.com). Under the EU CRA Regulation, deviations from the announced calendar are allowed only in limited circumstances and must be accompanied by a detailed explanation of the reasons for the deviation. In this case the deviation from Scope’s published calendar was due to the first-time publication of the ratings.

Potential conflicts
See www.scoperatings.com under Governance & Policies/Regulatory for a list of potential conflicts of interest disclosures related to the issuance of Credit Ratings, as well as a list of Ancillary Services and certain non-Credit Rating Agency services provided to Rated Entities and/or Related Third Parties.

Conditions of use / exclusion of liability
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