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Rating action

Scope Ratings GmbH (Scope) has affirmed 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 highly integrated institutional framework, which provides Spanish Autonomous Communities under the common regional financing system (régimen común) with close central government oversight of regional finances, and an optional system-wide liquidity support mechanism made available by the central government. Our evaluation of this framework results in an indicative rating range of A to BBB for the Autonomous Communities under the common regional financing system.

• A strong individual credit profile compared to its peers, characterised by robust budgetary performance, strong capital market access, solid liquidity buffer, a favourable debt profile, and a wealthy, diversified economy. An elevated debt burden—despite recent improvements—and limited expenditure flexibility remain challenges.

Key rating drivers

Strong intergovernmental integration with the Spanish State. Madrid, like all Autonomous Communities under Spain’s common regional financing system (régimen común), benefits from a mature and supportive institutional framework, characterised by robust fiscal integration, close central government oversight of regional finances, and an optional system-wide liquidity support mechanism made available by the central government. Scope’s evaluation of the institutional framework of Autonomous Communities operating under the common regional financing system places the regions within an indicative rating range spanning from A to BBB. This assessment reflects their strong intergovernmental integration with the Spanish sovereign (A/Stable).

The central government plays a significant role in regional finances through funding mechanisms, fiscal oversight, and crisis support, notably via the FLA (Fondo de Liquidez Autonómico) and FF (Fondo de Facilidad Financiera), which have dominated regional debt composition since 2012. By Q3 2024, approximately 63% of total regional debt was in the form of FLA/FF loans, highlighting the long-term dependence of many regions on central government funding. However, Madrid has no FLA/FF debt, as it has consistently financed itself through market issuances and alternative funding sources, maintaining greater fiscal autonomy compared to other regions.

The fiscal equalisation system, primarily based on shared taxes and redistribution mechanisms, enables regions to fund essential services but remains politically contentious, with ongoing debates over transparency, transfer dependency, and fiscal autonomy demands from high-contributing regions like Madrid. Despite managing key expenditure areas such as healthcare, education, and social services, regional fiscal autonomy remains generally constrained, with limited flexibility to adjust revenues or spending. Political integration between the state and Autonomous Communities is moderate, with regional parties exerting influence at the national level, though governance coherence is affected by political negotiations and regional interests.

In February 2025, the national government proposed a EUR 83bn debt relief (25% of total regional debt) to ease financial burdens. If implemented, it could improve regional debt metrics, though the growing role of bilateral negotiations adds uncertainty to the system’s predictability. The state is expected to assume the debt gradually, aligned with maturities, rather than cancelling it outright. Moreover, implementation requires modifications to the regional financing system, which currently prohibits unilateral debt forgiveness, as well as parliamentary approval, expected no earlier than year-end. However, a potential debt forgiveness does not fully address structural challenges in regional financing, as deficit pressures in Spanish Autonomous Communities largely stem from the growth of non-financial expenditures, raising concerns about long-term debt sustainability. For Madrid, which has no FLA/FF debt, it remains unclear how its proposed EUR 8.6bn debt relief will be implemented. Discussions include the option of the central government providing additional revenue transfers linked to Madrid’s debt maturities.

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

Robust budgetary performance. Madrid's budgetary performance remains strong, supported by robust revenue growth, disciplined expenditure management, and prudent fiscal oversight. In 2023, the budget deficit stood at 0.7% of GDP, exceeding the 0.3% benchmark but outperforming the 0.9% average among Autonomous Communities, reflecting effective fiscal discipline. The operating balance averaged 5.6% of operating revenue during 2020-2023, supported by expenditure controls, with 2024 projected at 4.6%, indicating continued fiscal sustainability. Capital expenditure has been increasing, averaging 5.0% of total spending (2020-2023) and rising to 5.6% in 2024, reflecting investment in infrastructure and public services. Looking ahead, Scope expects Madrid’s operating balance to improve to 6.0% by 2028, though higher investment spending may put pressure on the balance after capital accounts. While Madrid maintains greater revenue flexibility than most Autonomous Communities, supported by its diversified tax base and independence from FLA/FF funding, its ability to unilaterally increase revenue remains constrained by Spain’s tax-sharing framework.

Strong liquidity position and access to capital markets, and favourable debt profile. The Community of Madrid maintains a strong liquidity position, primarily supported by the Treasury, Financing, and Collection Agreement, alongside a Commercial Paper Issuance Programme. As of December 31, 2024, the total short-term financing capacity amounts to EUR 2.82bn, comprising EUR 1.82bn under the Treasury Agreement—of which EUR 1.1bn is in credit lines and EUR 720m in current account credits—and an additional EUR 1bn through the Commercial Paper Issuance Programme. As of year-end 2024, outstanding short-term debt amounted to EUR 162m, consisting of EUR 97m in credit lines and EUR 65m in commercial paper. Additionally, the Community of Madrid’s liquidity position remains stable, with cash reserves totalling EUR 106m, including EUR 50m in fixed-term deposits and the remainder held in current accounts.

Madrid’s short-term financing strategy is well-diversified, ensuring efficient liquidity management with favourable interest rates and inclusion of multiple financial institutions, mitigating counterparty risk and ensuring stable access to liquidity. Since 2021, Madrid has actively managed its liquidity surplus by entering interest-bearing agreements with financial institutions, adjusting rates annually to market conditions. As of November 2024, the average rate on remunerated accounts is 3.28%, while EUR 75m in fixed-term deposits earns 3.7%. The interest income from these arrangements fully offsets short-term financing costs, effectively reducing Madrid’s overall financial burden.

Madrid’s debt profile remains favourable, with a 100% euro-denominated structure and 94.4% fixed-rate debt as of year-end 2024, reflecting strong interest rate protection. The funding mix is well-diversified, with 58.1% in bonds and 41.9% in loans, while the absence of FLA/FF loans highlights Madrid’s financial independence and strong market access. The region’s 8.1-year average debt maturity as of October 2024 underscores conservative debt management. In 2025, total funding needs are estimated at EUR 3.2bn, consisting of EUR 2.8bn in redemptions and a modest EUR 316m deficit, following EUR 4.4bn in issuance in 2024. Over 2025-2027, refinancing needs represent around a quarter of total debt, remaining well within sustainable levels.

Wealthy and diversified local economy. Madrid maintains strong economic resilience, with GDP per capita at 137% of the national average in 2023. The region benefits from a diversified economy, with key sectors in finance, technology, and business services, and maintains a competitive business environment that attracts domestic and foreign investment. Unemployment has improved significantly, declining from 13.5% in 2020 to 8.6% in 2024, despite rapid population growth. Madrid’s strategic location, developed infrastructure, and skilled workforce contribute to its long-term economic sustainability, though rising housing costs may pose challenges. Its strong transport network and leading educational institutions further support economic expansion, reinforcing its role as Spain’s primary economic hub.

Despite these strengths, Madrid faces two key challenges:

A still elevated debt burden, despite recent improvements in indebtedness metrics. Madrid’s debt burden declined from 161% of operating revenue in 2022 to 136% in 2024, below the 164% average among Autonomous Communities. Supported by strong revenue growth and disciplined borrowing, the ratio is expected to gradually fall to 120% by 2028. This process could accelerate if the proposed EUR 8.6bn debt relief is implemented, potentially reducing Madrid’s debt stock by 23%. However, as Madrid holds no FLA/FF debt, discussions focus on alternative relief structures, such as revenue transfers linked to debt maturities. If phased in from 2025 to 2028, the measure could lower the debt ratio to 90% of operating revenue, enhancing fiscal sustainability.

Limited expenditure flexibility. Madrid’s expenditure flexibility is limited, as healthcare, education, and social services make up a fixed and growing share of the budget. Healthcare spending exceeds 35%, driven by an aging population and rising medical costs, while education accounts for 25%, covering salaries, school operations, and facility expansion. Long-term infrastructure investments in transport and public services further restrict short-term budget adjustments due to multi-year financial commitments. Although capital expenditures have remained stable, growing investment needs linked to population growth may further reduce budgetary flexibility.

Outlook and rating sensitivities

The Stable Outlooks reflect 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 Autonomous Communities (under the common regional financing system) 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.

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 transparent policymaking, fiscal discipline, and effective financial management. It has a strong budget execution record, aligning financial planning with fiscal goals. Independent market access and prudent debt management highlight its financial autonomy, while robust oversight and regulatory compliance reinforce institutional resilience.

Social factors are captured under Scope’s assessment of Madrid’s ‘economic sustainability’ and ‘Social factors and resilience’. Madrid maintains strong social stability, driven by a dynamic labour market and solid public services. However, income inequality and rising housing costs pose challenges, particularly for lower-income residents. An aging population may also increase long-term fiscal pressures, especially in healthcare and pensions. Well-developed healthcare and education systems help mitigate risks, while stable security and welfare indicators reinforce social resilience.

Environmental factors are captured under Scope’s assessment of Madrid’s ‘environmental factors and resilience’. Madrid exhibits moderate environmental resilience, with strong climate policies but persistent air pollution and adaptation challenges. It targets a 65% emissions reduction by 2030, having already cut emissions by 48% (1999-2022), though transport and residential sectors remain major contributors. Despite climate risks like heatwaves and droughts, efforts in urban greening, sustainable transport, and green financing provide some mitigation, though further investment is needed. Madrid maintains one of the lowest per capita GHG emissions among Autonomous Communities, dropping from 3.8 tCO₂ in 2013 to 3.2 tCO₂ in 2022, outperforming regions with similar urban profiles. This progress reflects ongoing investments in public transport, clean energy, and stricter environmental regulations.
 
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 29 November 2024.

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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