July 20 (SeeNews) - Moody's Investors Service said it has upgraded to Baa2 from Ba1 the long-term issuer ratings of Croatia's capital Zagreb and its utility company Zagrebacki Holding, to reflect a similar action on the government's ratings taken in view of the upcoming euro adoption in January 2023.
“The rating action follows Moody's decision to upgrade to Baa2 from Ba1 the rating of the Government of Croatia's on July 15, 2022,” the global ratings agency said in a statement late on Tuesday.
The outlooks on both issuers are stable. Moody's has also upgraded Zagreb's Baseline Credit Assessment (BCA) to baa2 from ba1. This way, Moody's has concluded the review for upgrade that was initiated on June 28, 2022.
With the sovereign rating upgrade to Baa2 from Ba1 and the improvement of the operating environment following the adoption of the euro, Moody's expects positive repercussions for regional and local governments in the country, including the capital city of Zagreb and its Zagrebacki Holding.
“The strengthening long-term growth prospects for the country will have a positive impact on shared taxes and government transfers which represent more than 80% of the city of Zagreb's operating revenue. The capital city's strong economy, which represents one third of the country's GDP, further supports the municipality's revenue base,” according to the statement.
Moody's believes that the euro adoption will have positive effects on the municipal economy by reducing transaction costs and eliminating any remaining foreign currency risks with important trade partners. Improved economic prospects will likely attract investments, which should contribute to Zagreb's higher tax base in the future.
The Baa2 rating of the City of Zagreb reflects the city's large and well-diversified local economy contributing to a tax revenue base with low volatility and a positive growth trend. Moreover, its traditionally prudent budgetary management resulted in a solid operating surplus of 7% of operating revenue in 2021, expected to further improve in the next couple of years, Moody's added.
With financial surpluses expected in 2022, the city's low direct debt will remain below 30% of operating revenue this year. The net direct and indirect debt including the debt of some of its city-owned companies, is moderate at around 66% of its operating revenues in 2022 and will further decline in the medium term thanks to improving financial results and its capital expenditure that will remain largely self-funded.
Earlier this month, the European Parliament approved Croatia’s entry into the eurozone as of the beginning of next year. The Adriatic country of 3.85 million people will be the 20th member of the eurozone.