SOFIA (Bulgaria), February 24 (SeeNews) – Standard&Poor's Ratings Services (S&P) said on Friday it affirmed its long-term issuer credit rating on Bulgaria's second largest city of Plovdiv at 'BB+'.
The city’s outlook remains stable, the agency said in a statement.
"We expect high expenditures until 2019 when the city of Plovdiv will be the European Capital of Culture. We forecast that this will not have a significant effect on the city's financial indicators or its debt position, as most capital expenditures will be funded via already contracted debt issuance," the rating agency noted.
S&P also said in the statement:
"RATIONALE
The rating benefits from Plovdiv's low but increasing tax-supported debt burden, with low contingent liabilities. We also take into account the city's average budgetary performance and flexibility, as well as its adequate liquidity position. The rating is somewhat constrained by the evolving and unbalanced institutional framework for municipalities in Bulgaria, and the city's weak financial management and weak economy by international standards.
Our assessment of Plovdiv's stand-alone credit profile (SACP) is 'bbb-'. In accordance with our criteria for rating non-U.S. local and regional governments (LRGs), we generally cap the long-term rating on an LRG at the same level as its respective sovereign. We believe the institutional and financial framework of Bulgarian LRGs limits their ability to meet the conditions specified in our criteria and be rated above their related sovereign. In particular, we view their autonomy to be limited by the still-high dependency on central government grants, subjecting local budgets to volatility stemming from intergovernmental relations, as well as by the still relatively centralized system, with low predictability on the outcome of reforms.
Given our opinion that Bulgarian municipalities operate under an evolving and unbalanced institutional framework, we don't rule out the possibility of unexpected changes in the distribution of revenues and government-mandated spending. We think Plovdiv might feel the impact of these changes more than other municipalities, in particular because it is the second-largest city in Bulgaria.
We view Plovdiv's economy as in line with national wealth levels, but relatively weak in an international comparison. We estimate three-year average national GDP per capita at about $7,300, with regional GDP in the larger Plovdiv region at about 80% of the national average. Plovdiv benefits from industrial zones, such as the Trakia Economic Zone, housing a variety of companies from diverse business segments, as well as the IT services and auto industries. We estimate that GDP per capita is higher in the city than in the agricultural region of Plovdiv. We forecast Plovdiv's GDP will expand roughly in line with our forecast for Bulgaria's economy, at an average of 2.7%per year until year-end 2019. The regional economy of Plovdiv might see an additional uptick in economic growth due to continued investment in capital projects as it prepares to be the European Capital of Culture (ECoC) in 2019. Unlike Bulgaria as a whole, Plovdiv's demographics are relatively stable, with the number of inhabitants at about 341,600.
The rating takes into account our assessment of financial management as weak, when compared globally. Although management prudently relies on long-term borrowing and has demonstrated its willingness to raise taxes and delay spending in the past, its long-term financial policy and liquidity management lack predictability and limit future tax-raising possibilities. Moreover, the city tends to overestimate capital and maintenance spending in its budget, which results in large differences between budgeted and actual financial indicators. This may further undermine the credibility of annual budgeting and the city's financial planning, in our view.
We view Plovdiv's budgetary performance as overall average and forecast that operating surpluses will slightly weaken over 2017-2019, averaging about 9% of operating revenues over this period. This will be backed by increased expenditures for the ECoC in 2019, as well ashigher maintenance and personnel spending.
Plovdiv has announced plans to tackle its infrastructure spending backlog, focusing on transport, water, and sewage projects, as well as the construction of sport facilities and kindergartens. While it is likely that financial assistance from the central government and EU programs will be available, these expenses will weigh on the city's budgetary performance, in our view. We further note that while we expect capital expenditures to slightly decline, this could change given the 2014-2020 EU funding cycle. Overall, we expect that the balance after capital accounts will become negative again after a positive figure in 2016.
Plovdiv's budgetary performance is volatile, in our view, as it remains dependent on the realization of capital-expenditure programs, payment procedures, and corresponding transfers received from the central government. A large share of expenditures and corresponding revenues are related to tasks the central government has delegated to Plovdiv. We believe that the city could postpone projects if co-financing funds, especially funds from the central government, are delayed or cancelled.
The central government also controls the tax base and sets the floor and ceiling tax rates. Plovdiv has the authority to manage its own taxes and charges, which remain well below the central government's maximum ceiling. However, we consider its ability to fully utilize this flexibility in practice as limited. On the revenue side, it is constrained by taxpayers' unwillingness and inability to pay higher taxes, while its ability to cut expenditures remains constrained, in our opinion. These characteristics lead to our overall assessment of average budgetary flexibility.
Plovdiv will likely finance capital expenditures through 2019 by issuing debt. The city has contracted a loan from the European Bank for Reconstruction and Development to upgrade its road infrastructure. We expect the majority of the loan to be disbursed this year and the remainder in 2018. Because of the city's widening deficit due to its capital-spending program, we believe that its debt burden will increase but stay well below 60% of operating revenues by year-end 2019, depending on actual achievements as the city implements the program. Because of a reliance on long-term borrowings, Plovdiv's debt service is set to remain modest, at about 7% of adjusted operating revenues through 2019.
The city has minimal involvement in the local economy and holds shares in a number of government-related entities. Therefore, its contingent liabilities remain restricted mostly to the liabilities and payables of a few health care institutions, which it might take on if needed and if political pressures arise.
LIQUIDITY
We consider Plovdiv's liquidity as adequate. The assessment reflects our expectation that the city's average cash on accounts will well exceed its debt service falling due in the next 12 months, assuming no change in liquidity management. Adjusted for our base case of budget execution in 2017, free cash over the next 12 months will continue covering more than 5x the debt falling due over that period. Available cash reserves are vast in an international comparison as they cover the city's total outstanding direct debt.
We view the city's access to external liquidity as limited on account of Bulgaria's weak domestic banking sector, as reflected in our banking industry country risk assessment (BICRA) score of '7' (see "Banking Industry Country Risk Assessment: Bulgaria," published Dec. 30, 2016, on RatingsDirect). Bulgarian banks are predominantly foreign owned.
Moreover, we expect the city's liquidity will be volatile due to its uncertain financial policy, high levels of cash reserved for government-delegated tasks, and potential cash draws from investment projects.
OUTLOOK
The stable outlook reflects that on Bulgaria (BB+/Stable/B). Any rating action we take on the sovereign would likely be followed by a similar action on Plovdiv.
An upgrade of Plovdiv is contingent on a positive rating action on Bulgaria, as we do not rate Bulgarian municipalities above the sovereign.
A downgrade stemming from a deterioration of Plovdiv's SACP seems currently very unlikely, since the SACP is higher than the long-term rating on the city. We would lower the SACP if we saw deterioration in the city's financial performance, which could either result in debt accumulation beyond our base-case scenario, or depletion of cash reserves to a level that is not sufficient to cover yearly debt service."