January 14 (SeeNews) - Fitch Ratings said it has affirmed the long-term foreign rating of the Romanian capital Bucharest 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 Friday evening.
Fitch said that the affirmation reflects Bucharest's continuing sound operating performance, moderate debt levels relative to the city's operating balance and current revenue, and sound debt ratios.
The ratings also factor in a strong tax base, due to Bucharest's wealth being substantially greater than the national average, it added.
Fitch also said in the statement:
"KEY RATING DRIVERS
Institutional Framework (Neutral/Stable)
Local governments in Romania are subject to significant control and supervision by the central government. They are obliged to provide the central government with an annual report together with their balance sheet, an annual budget and multi-year forecasts. The local budget has to be approved by local councils and all new debt and guaranteed debt have 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 salaries, which are the main expenditure item and make up about 40% of current spending for some local governments, but which are much lower in the case of Bucharest. According to the city, personnel costs accounted for a relatively low 5.4% of current expenditure for 2018.
Fiscal Performance (Strength/Stable)
Fitch's baseline scenario forecasts a reduced operating margin of above 15% in the medium term, below Bucharest's five-year average of 26%. This is in line with the city's preliminary 2018 results, which showed an operating margin of 13.6%. The drop in the operating margin was driven by higher personnel costs following wage increases for public employees and higher current transfers to public institutions and for social assistance. According to preliminary 2018 results, the operating balance covered interest expenses by at least 6x and the current balance was sufficient to cover about 47% of the city's investments. In Fitch's view, operating performance will remain sufficient to cover debt servicing and a large part of the investments scheduled in 2019.
We expect operating expenditure to continue increasing, but our base case projects the city's performance 2018-2020 to remain at least in line with that of 2018. The city faces high investment needs to cope with a growing population and the local authorities' plan to further develop the city's infrastructure and, in particular, general road infrastructure. We expect the city's capex to remain slightly below that envisaged in 2019 (RON1 billion). According to our base case, the current margin should cover the city's capex in 2019-2020 and, according to the city, scheduled investments would not be financed by debt.
Debt, Liabilities & Liquidity (Neutral/Stable)
Direct risk declined by RON31 million to RON2,788 million at end-2018 (51% of current revenue) on a preliminary basis. The city aims to reduce direct risk further in 2019. This should support the city's debt coverage with direct risk declining to close to 50% in 2020 and payback (direct risk-to-current balance) to remain at around four years in 2020 (2018: 4.4 years). Debt servicing is supported by the city's liquidity (3Q18: RON144 million).
Bucharest faces some contingent risk from its fully-owned local heating provider, Radet. The city's exposure to Radet through the latter's liabilities to SC Electrocentrale Bucuresti SA (end-October 2018: RON3,802 million) should ease once the two entities, which are currently in insolvency proceedings, are reorganised as planned. On 17 May 2018, the General Council of Bucharest Municipality approved the introduction of the centralised thermal energy supply system (SACET) in the context of the reorganisation of Radet and Electrocentrale Bucuresti S.A. This includes the transfer of the business of both entities to a newly created company, Municipal Company Energetica Bucharest S.A.
Bucharest is the capital of Romania and had 1.883 million inhabitants, based on the last census in 2011. 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 6.9% in real terms in 2017, and Fitch expects it to have grown by a further 3.8% in 2018 (3.5% in 2019). Bucharest has a strong labour market, with an unemployment rate at 1.3% in August 2018, significantly below the national average of 4.3%.
Fitch views the city's administration as prudent, as reflected in the maintenance of tight debt limit ratios, cautious investment planning, and in maintaining a legally required balanced budget and high liquidity. The city successfully refinanced a RON555 million bond due 4 May 2018 with a new domestic bond with a bullet repayment in 2028. This high liquidity compensates for the lack of a sinking fund to cover the bullet repayment of another domestic bond due in 2020.
RATING SENSITIVITIES
Bucharest's ratings are constrained by the sovereign's ratings. A sovereign upgrade would be reflected in the city's ratings provided Bucharest maintains strong operating performance and sound debt metrics with investments 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=4.6782 lei)