Fitch Ratings says the outlook for non-US local and regional governments (LRGs) remains challenging for 2012.

On the other hand, emerging market economies and those in APAC have fared better and Fitch has taken fewer negative rating actions.

The weak recovery in some countries is making the fiscal position for subnationals challenging, especially for LRGs whose revenues are closely correlated with the economic cycle. Cuts in expenditure have not been drastic enough to compensate for revenue decline. In many countries, subnationals are responsible for the delivery of essential services such as health care and education and these costs are rigid. Revenue growth in 2012 is expected to be muted and LRGs will have to review expenditure to maintain satisfactory operating balances.

In order to contain overall expenditure, many subnationals have taken drastic action to curb capital expenditure, which is the least rigid item in many budgets. This is a step back from previous years when capital expenditure was increased as part of anti-cyclical measures.

Despite drastic cut backs, the budgets of many subnationals, primarily in Western Europe, are registering deficits. Although these are estimated to be lower in 2012 than in 2011, they are still significant, meaning debt will continue to increase to fund these deficits.

Fiscal consolidation, deficit reductions and access to liquidity are major factors that will impact subnationals creditworthiness globally in 2012. Despite emerging market credit improvements, further deterioration of the European crisis would have a global impact and make it more difficult for sub-nationals to access long-term funding.

Please see the full report 2012 Outlook: International Public Finance

Technorati Tags: Eurozone, Italy, local and regional government, Portugal, public-finance, Spain