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Increased liabilities increase sustainability risks, warns CFP

Increased liabilities increase sustainability risks, warns CFP

The Public Finance Council stressed that the “increasing expression” of contingent liabilities, which has been increasing since 2015, and linked to the successive deterioration of financial debt and the resulting refinancing needs “contribute to the increased sustainability risks” of the finances of the Azores.

The Council of Public Finances (CFP) warned that the budget situation of the Autonomous Region of the Azores remains below pre-pandemic levels, in the report published on Wednesday, on the development of the autonomous regions' budget in 2022.

The same organization stressed that the “increasing expression” of contingent liabilities, which have increased since 2015, and linked to the successive deterioration of financial debt and the resulting refinancing needs, “contribute to increasing the sustainability risks” of the financial affairs of this autonomous region.

“Despite the decline in the budget deficit, the budget situation in the Autonomous Region of the Azores remains below pre-pandemic levels. In 2022, the Azores presented a deficit of 7.7% of the region's GDP, a decrease of 0.7 percentage points Compared to 2021, although transfers decreased by 1.1 percentage points under the LFRA, the partial dissipation of the impact of the measures adopted in the context of the pandemic contributed significantly to this development (1.6 points in the GDPR). Impact through the new financial support provided by the Regional Government of the Azores to SATA Air Açores, SA, which in 2022 increased its impact on RAA financing requirements (1.2 percentage points of GDPR) leading to a recovery in the budgetary position. The absolute impact of these impacts, the region will still have a deficit of 3.1% of GDP, almost double what we saw in 2019.

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These developments have led to the debt ratio, in the Maastricht definition, reaching a new maximum, the CFP added. “In 2022, this indicator reached 3,064 million euros, equivalent to 60% of the region’s GDP, an increase of 0.6 percentage points compared to 2021,” the report says.

This organization indicates that the debt stock rose in absolute terms by 13.1%, “driven by the budget deficit that in 2022 contributed to increasing the region’s debt” to 3,064 million euros. “The Azores’ high financial debt remains vulnerable to debt refinancing risks,” the CFP said.

Report warns of debt repayment

“The profile of regional debt payments (excluding off-budget entities) shows that more than three-quarters of these repayments to be made over the next 15 years will be repaid in full on the due date of the instrument in question (rather than on a regular basis over time). This situation results from the adoption of the distinctive financing method on a single repayment period. This method leads to an excessive focus on repayment in certain periods, which increases the risks of refinancing debts in periods of greater volatility in the financial markets. The debt repayment plan shows that in the 15 years Only in the next 5 years (2031, 2033, 2034, 2035 and 2037) will financing needs remain, totaling €35 million (1.2% of the total). Over the remaining 10 years, the total planned recoveries will reach €2,794 million (98.8% of the total). The situation is also indicated in the recent opinion of the Court of Auditors in Conta dos Açores 2022, in which it proposes the need to adopt measures that enhance the smoothness of the debt maturity profile, with the aim of mitigating refinancing risks and associated costs,” warns the CFP.

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The report adds that global debt, which also includes commercial debt, “rose to 3,108 million euros (60.8% of GDP), which mainly reflects deficit financing, the assumption of financial debt by some regional public companies and the implementation of a debt increase process.” “Capital of SATA Air Açores SA,” said the CFP.

The report draws attention to a further increase in contingent liabilities to €2,439 million, in 2022, (47.7% of GDP), “mainly due to liabilities incurred towards off-budget public entities, in particular those related to Sata Group companies.” in the restructuring process.

Growth does not eliminate debt growth

The CFP highlighted that although, in 2022, the Azores' nominal GDP achieved the highest growth (12%) since 1995, this variation “was not sufficient to alter the course of the successive deterioration of the debt ratio” in the region that had been observed. In the last report. Fourteen years.

In 2022, the Azores showed economic growth in line with what the country had seen, with economic activity remaining above the pre-pandemic level. According to the interim results of the regional accounts for the year 2022, the output generated in the region recorded a real growth of 6.8%, which is less intense than what was witnessed in 2021. The sectors of trade, transportation, accommodation and restaurants, as well as the services provided to companies, contributed to this growth with a variation of 18.3% and 19%. 6% respectively, but penalized by lower gross value added (GVA) for agriculture, forestry and fishing (-2.6%),” the report says.

The CFP states that nearly three-quarters (72%) of the decrease in actual expenditures in the Azores in 2022 was due to “partial dissipation of the impact” of the Covid-19 emergency measures (from €112.5 million in 2021 to €42.3 million) million Euro in 2022).

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The report also left other observations about the finances of the Azores. “Interest charges have halted the downward trend observed since 2017. In 2022, regional public debt charges totaled €41.6 million, €2.1 million higher than in 2021. Revenues saw a 6.9% decrease due to lower transfers from the state and the rest of the world.In its second year of implementation, the Recovery and Resilience Plan continues to perform below expectations.