Fitch Ratings-London-18 November 2008: Fitch Ratings has today affirmed the Republic of San Marino's Long-term foreign currency Issuer Default rating (IDR) at 'AA' with a Stable Outlook. The Short-term foreign currency IDR rating is affirmed at 'F1+', and the Country Ceiling is affirmed at 'AAA'.
San Marino's sovereign rating is supported by high GDP per head (USD55,000 at market exchange rates in 2007), the country's superior growth performance relative to Italy, and strong public finances bolstered by strict controls on current expenditures since 2002.
"Fitch deems strong public-sector solvency and liquidity essential given the dominant role of the financial sector in the economy and the risks therein," says Andres Klaar, associate director in Fitch's Sovereigns Group. "San Marino's banks have weathered the global financial turmoil well thanks to their retail deposit-based funding. Nevertheless, the size of the banking sector, which is around 9 times GDP, coupled with the central bank's inability to print money, means that the sovereign has limited capacity to support the system."
Fitch takes comfort from the banks' reliance on deposit-taking as their main source of funding, their low loan-to-deposit ratio (around 60% according to the Central Bank of San Marino (CBSM)) and their net external creditor position. Such factors served San Marino well in 2002, enabling it to successfully ride-out an Italian tax amnesty on offshore deposits. Despite the global financial turmoil, the banking system has remained stable and there has been no repetition of early 2006 when the CBSM put a small bank into special administration, providing EUR19.5m of liquidity support which was guaranteed by the government. Reputation risk is critical to the country's status as an offshore financial centre. San Marino introduced EU withholding taxes in 2005 rather than relinquish bank secrecy. However, the EU will continue to take a strong line on bank secrecy, challenging San Marino banks' attractiveness over time, while a broader lack of transparency remains an issue.
Public finances have improved over the decade. With budget surpluses since 2003, the government's gross debt has remained one of the lowest among Fitch-rated sovereigns. Likewise, the government's liquidity position has strengthened since 2002 with its cash balance reaching around EUR275m (21% of Fitch's GDP forecast for 2008) at end-September 2008 and negligible short-term debt. The government borrows from Sammarinese and Italian banks and annual loan amortisation payments are low at around EUR10m. These strong fiscal indicators help to offset a large stock of net tax claims which undermine the government's net wealth. At the end of 2007 the government was liable for tax reimbursements and other liabilities of EUR817m (66.9%), whereas outstanding unsettled tax claims and other assets amounted to EUR680m (55.7% of GDP). The latter also gives rise to credit risk against which the government has made provisions of EUR64.8m over the last two years.
Sammarinese sovereign ratings are also supported by its well-diversified economy, relative to its size, with industry providing the largest share of value-added (37% as of 2007), and its close integration with the affluent north-western region of Italy. Despite the challenges to bank secrecy, Fitch believes that San Marino will retain its attraction for Italian investors at the margin by maintaining low tax rates and fiscal prudence.
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