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Fitch affirms Bucharest city rating at BBB-, outlook stable

Fitch affirms Bucharest city rating at BBB-, outlook stable Author: Stefan Jurca Licence CC BY 2.0

BUCHAREST (Romania), July 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 the relatively high dependence of operating revenues on the economic cycle and uncertainties about contingent liabilities, it added.

Fitch also said in the statement:

"KEY RATING DRIVERS

Local governments in Romania have heavy government control and supervision. They are obliged to provide an annual report together with a 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 before contracting. 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 make up about 40% of current spending.

Fitch's baseline scenario expects an operating margin of about 29% in the medium term (2016: 30.4%), in line with the five-year average performance of 29% and sufficient to pre-finance the city's realised investments at this time. According to the 2017 budget, the operating margin could reach 30.3%, considering a 3% increase of taxes and large opex growth (26%) driven by an increase in goods and services, which we assume to be largely in line with the last five year average of 3.5%.

We expect the city's performance to remain stable in 2018-2019. Bucharest has limited reliance on central government VAT transfers and should not be greatly affected by the cut to the VAT base rate (by 4pp to 20% in 2016). Following the June 2016 local elections, a new mayor was instated and an updated investment plan has been approved. The government aims to further develop the city's infrastructure and general road infrastructure in particular and envisages RON1,360 million of investment in 2017. However, the final amount will depend on available funding.

Direct risk declined by RON156 million to RON2,961 million at end-2016 (68% of current revenue). The city plans to reduce direct risk to about RON2.8 billion in 2019, roughly in line with our base case, expecting its direct risk to remain below RON3 billion. This should support the city's debt coverage with direct risk to decline to about 56% in 2019 and a payback (direct debt to current balance) to remain below 3 years in 2019 (2016: 2.4 years). Debt servicing is supported by the city's liquidity (RON1,104 million at end-2016).

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

Local wealth is more than twice the national average and has proved robust through economic cycles, thanks to the well-diversified economy. Romania's GDP grew 4.8% in real terms in 2016, and Fitch expects it to grow by a further 4.8% in 2017 (and 3.9% in 2018). Bucharest has a robust employment market. The unemployment rate was 1.4% at end-2016, significantly below the national average of 4.8%.

Fitch views the management as prudent, reflected in the maintenance of prudential debt limit ratios, cautious investment planning, avoidance of legally required deficits and high liquidity in place. 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. In case of a sovereign upgrade the city could be upgraded if it maintains a strong operating performance and sound debt metrics that ensures 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=4.5645 lei)

 

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