November 20 (SeeNews) - Fitch Ratings said it has affirmed the long-term foreign and local currency ratings and the short-term rating of the Metropolitan Municipality of Istanbul at BBB- and F3, respectively.
The outlook on the ratings is stable, Fitch said in a statement on Tuesday.
At the same time, the national rating has been affirmed at AA+(tur) with a stable outlook, it added.
Fitch also said in the statement:
"KEY RATING DRIVERS
Istanbul's ratings reflect its resilient operating performance, wealthy economy and solid fiscal management. They also take into account the high debt and significant foreign currency exposure. The Outlooks are Stable as operating performance and debt metrics should remain consistent with the current ratings.
Fitch expects Istanbul to continue posting strong operating surpluses owing to its large and well diversified local tax base and largely investment focused responsibilities. The local economy stayed resilient during a slowdown of the national economy in 2012, expanding its tax revenue by 14% yoy. Operating performance in 2012 was also strong with the operating margin yielding up to 60%. Lower annual interest payments are expected to lead to an improvement of current margins, which is projected to be in the high 50% in 2013-2015.
Istanbul is Turkey's main economic hub contributing about to one fourth of national GDP and more than 40% of national tax receipts. Rapid urbanisation challenges the province with a continued need of infrastructure investments. In 2012 the population stood at 13.9m versus 13.6 m in 2011. The per capita income of Istanbul was 29% above the national average in 2012
Direct debt stood at TRY4579.3m at end 2012, declining by 12.1% (yoy), which equates to 67% of its current revenue. Istanbul's debt portfolio consisting mainly of EUR denominated debt exposes it to a significant foreign exchange risk in times of elevated financial volatility. At end 2012 the foreign currency debt share in its total debt stock stood at 88.5% however this high foreign exchange risk is mitigated by the lengthy maturity profile averaging 8.4 years. Furthermore, management's local borrowing strategy change in search of long term local borrowing led to a sharp cut in short term local borrowings and also increased the FX funding share in its debt portfolio. Given its robust budgetary performance, debt servicing to operating balance was at 26.6% in 2012.
The debt of IETT, Istanbul's metro operator and also part financier of the construction of the metro is set to decline sharply from 2014 and to redeem by end of 2019. The continuation of the investment burden in metro construction will be eliminated significantly as of 2014, as the Ministry of Transport would also be in charge of promoting part of the investments.
High capital expenditure needs require a consistent operating performance with an operating margin above 50%. Fitch expects spending pressure on investments to decline due to improved budgetary planning and the administration's cautious approach.
RATING SENSITIVITIES
A sovereign downgrade of Turkey (BBB-/F3) would prompt a downgrade. Further, persistent financial instability resulting in sharp foreign currency and interest rate volatility could prompt a downgrade, although this is not currently expected under Fitch's base case scenario.
Easing of direct risk with the elimination of Fitch classified debt and continuation of financial strength coupled with consistent management policies would be positive for the Long-term local currency and National Ratings.
KEY ASSUMPTIONS
Our base case scenario relies on the following assumptions:
- Operating margin to remain above 50%
- Current balance sufficient to cover at least 60% of capital expenditure
- Debt to remain around current levels until 2015"