March 14 (SeeNews) - Moody's Public Sector Europe (MPSE) said it has changed the outlook of the City of Zagreb to stable from negative, while also affirming the Ba2 long-term issuer rating of the Croatian capital .
The change in outlook and the affirmation follow similar action on Croatia government's Ba2 bond rating on March 10, the ratings agency said in a statement late on Monday.
Moody's also said in the statement:
"RATIONALE FOR OUTLOOK CHANGE TO STABLE AND RATING AFFIRMATION
Today's outlook change follows the stabilisation in the Croatian sub-sovereign operating environment, reflected by the same change in outlook on the sovereign rating. The outlook change also reflects Moody's view that the creditworthiness of City of Zagreb is directly linked to that of the sovereign, as Croatian local governments depend on revenues that are linked to the sovereign's macroeconomic and fiscal performance.
Zagreb is highly dependent on intergovernmental revenues in a form of shared taxes and central government transfers, representing around 75% of its operating revenue in the past few years. Moody's believes that the stronger than expected economic growth outlook, both in the short and medium term, will be a positive for the city's income stream and will result in growing central government allocations for Zagreb. In addition, the institutional linkages illustrate the close ties between the two levels of government, as the sovereign has the ability to change the institutional framework under which local governments operate.
The affirmation of Zagreb's rating reflects its overall good fiscal discipline and sufficient operating performance, which is expected to return to double digit levels around 12% of operating revenue in 2017 after being adversely affected by Croatia's long recession, as well as changes in its tax law in the past two years.
In addition, the city's rating continues to be underpinned by its manageable direct debt burden and its crucial role as the capital city of Croatia.
Conversely, the rating reflects the challenges associated with the city's significant indirect debt exposure through its majority-owned company, Zagrebacki Holding D.O.O., the city's low liquidity and limited revenue control.
WHAT COULD CHANGE THE RATING UP/DOWN
Upward pressure on Zagreb's rating could arise from an upgrade of the sovereign rating.
Downward pressure on the rating could result from a downgrade of Croatia's sovereign rating; and/or sustained deterioration in the city's operating performance and/or material increase in its debt and debt-servicing needs.
The sovereign action required the publication of this credit rating action on a date that deviates from the previously scheduled release date in the sovereign release calendar, published on www.moodys.com.
The specific economic indicators, as required by EU regulation, are not available for this entity. The following national economic indicators are relevant to the sovereign rating, which was used as an input to this credit rating action."