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The regions will face continuous upward pressure on spending this year, driven by inflation-related cost pressures and the reality that a large share of Covid-19 related spending has likely become structural.

Revenue allocations under the financing system are, however, set to rise substantially this year and in 2024, reflecting high revenue expected for the year but also better-than budgeted revenue growth in 2021 and 2022, which the system settles with a two-year lag.

“Also, large allocations of EU funds will sustain elevated investment and reduce recourse to debt financing,” says Giulia Branz, senior analyst at Scope Ratings.

Summary of credit views for the Spanish regions in 2023

Source: Scope Ratings​​​​​​​

Regions still tapping debt capital markets; ESG-linked issues in favour

With interest rates rising, a continued decline in debt-to-operating revenue ratios will be crucial to preserve strong credit profiles, especially for regions that have limited funding flexibility, hence the importance of the more favourable budgetary conditions.

“Challenges to debt affordability will be more emphasised for regions that have limited budgetary buffers to cover rising interest payments, though debt service is safeguarded by access to central government liquidity,” says Branz.

The increase in interest rates slowed down but did not halt regions’ bond issuance in 2022.

“Rather compressed spreads to Spain’s sovereign bond yields signal investors’ confidence in the framework in which regions operate with close ties to the central government,” says Branz.

Most of Spain’s active sub-sovereign issuers are making use of opportunities in the market for ESG-linked bonds, which brings advantages such as access to a more diversified investor base.

“Still, recent market volatility and uncertainties over economic conditions in Spain and the rest of the euro area will likely delay issuances to the second half of this year,” says Branz.