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Fitch affirms Bucharest at BBB-, outlook stable

Fitch affirms Bucharest at BBB-, outlook stable Bucharest, University square

BUCHAREST (Romania), January 15 (SeeNews) - Fitch Ratings said it has affirmed the long-term foreign rating of Bucharest city at BBB- with stable outlook.

The short-term rating of the city has been affirmed at F3, the credit rating agency said in a statement on Saturday.

Fitch said that the affirmation reflects Bucharest's continuous strong operating performance, its moderate level of debt relative to the operating balance and current revenues, sound debt ratios, as well as its strong tax base.

The ratings also reflect reflect the reliance of operating revenue on economic cycles and uncertainty over contingent liabilities, it added.

Fitch also said in the statement:

"KEY RATING DRIVERS

Local governments in Romania are subject to significant control and supervision by the central government. They are obliged to provide the central government their annual report together with their balance sheet, an annual budget and a multi-year forecast. The local budget has to be approved by local councils and all new debt and guaranteed debt has to be approved by the committee for authorisation of local debt. Local governments' financial flexibility is limited, as the state controls the main revenue sources, with personal income tax and VAT together accounting for about 70% of local budgets. The state controls the main expenditure item - salaries - which makes up about 40% of current spending.

Fitch's baseline scenario forecasts an operating margin of 29% in the medium term, in line with Bucharest's five-year average performance. This is in line with the city's 2017 budget, which forecasts an operating margin of 30.3%. We expect them to maintain the strong operating performance, in line with the historical average. Its operating margin for 3Q17 was 32.8%.

We expect the city's performance to remain stable in 2018-2019. As Bucharest has limited reliance on the central government's VAT transfers it should not be greatly affected by the cut to VAT (by 1pp to 19% in 2017). Following the June 2016 local elections, a new mayor was appointed and an updated investment plan approved. The government aims to further develop the city's infrastructure, in particular general roads. Until 3Q17, RON176 million of the envisaged RON1,337 million for 2017 was realised (2016: RON390 million).We expect capital expenditure to have accelerated during 4Q17 and for some of the investments scheduled for 2017 to be carried forward into 2018.

Direct risk declined RON87 million to RON2,874 million at end-2017 (66% of current revenue). This is in line with the city's plans to reduce and maintain direct risk below RON3 billion (in line with our base case). This should support the city's debt metrics with direct risk to decline to 56% of current revenue in 2019 and a direct debt-to-current balance to remain below three years in 2019 (2016: 2.4 years). Debt ratios and servicing are also supported by the city's strong liquidity (RON2,127 million at end-3Q17).

Bucharest's exposure to Radet's liabilities to SC Electrocentrale Bucuresti SA (2016: RON4,362 million), for heating consumption bills, current penalties and penalties, which are subject to a final court ruling, should be alleviated following the central government's agreement to a merger of the two entities.

Local wealth is more than twice the national average and has proved robust through economic cycles, due to Bucharest's well-diversified economy. Romania's GDP grew 4.8% in real terms in 2016, and Fitch expects it to have grown by a further 6.1% in 2017. This is followed by forecast growth of 3.7% in 2018 and 3.6% in 2019. Bucharest has a robust labour market, with the unemployment rate at 1.4% at end-2016, significantly below the national average of 4.8%.

Fitch views the city's administration as prudent, reflected in the maintenance of prudential debt limit ratios, cautious investment planning, maintaining at least a legally required balanced budget and high liquidity. The high liquidity compensates for the lack of a sinking fund to cover the bullet repayment of a domestic bond due in 2018.

RATING SENSITIVITIES
Bucharest's ratings are constrained by the sovereign's ratings (BBB-/Stable/F3)). In case of a sovereign upgrade the city could be upgraded if it maintains strong operating performance and sound debt metrics that ensure investments are largely funded by internal resources.

A significant increase in debt pressure due to deteriorating operating performance or recognition of contingent liabilities linked to the city's public-sector entities as direct debt would trigger a downgrade."

(1 euro=4.6377 lei)

 

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