"The stable outlook reflects our expectations that due to economic growth and conservative financial planning, Skopje will continue to maintain a strong operating surplus and a strong liquidity position that will balance its steadily rising debt burden," the ratings agency said in a statement on Monday.
S&P also said in the statement:
"[..] The ratings on the Municipality of Skopje, the capital of the Republic of Macedonia (BB/Stable/B) are constrained, in our view, by limited predictability of the municipality's finances due to the combination of the developing and unbalanced institutional framework under which it operates, the nascent nature of the municipality's long-term planning, low wealth levels, and limited fiscal flexibility given the municipality's pressing infrastructure needs.
In addition, the rating is affected by what we see as relatively large contingent liabilities. This is because municipal companies have weak performance and their exposure to liabilities incurred within private-public partnership projects is set to rise.
The ratings are supported by Skopje's strong operating performance, high cash reserves and gradually increasing, if still low, tax-supported debt. We regard Skopje's liquidity as a positive factor for the rating due to its large cash holding, which comfortably exceeds the municipality's debt service falling due within the next 12 months.
It also benefits from a robust internal cash flow generation capability, but we view its access to external liquidity as uncertain, owing to the relatively immature local banking system and capital markets for municipal debt.
In our view, economic growth and conservative financial planning should mean that the municipality of Skopje will maintain a strong operating surplus and high capital revenues as well as a strong liquidity position that would offset
its steadily rising debt burden.
We could lower the rating if the sovereign credit rating on Macedonia were lowered. Even if the sovereign rating remains intact, we may lower the rating on Skopje within the next 12 months if, in line with our downside-case scenario, the municipality depletes its cash reserves to maintain a high level of capital investments while access to external funding becomes constrained.
In our view, this scenario may lead to a structural worsening of the municipality's currently very strong liquidity position.
If we were to raise the sovereign ratings on Macedonia, we could also raise the rating on Skopje within the next 12 months if, in line with our upside-case scenario, a rapid recovery in the municipality's real estate market led to faster revenue growth than that expected under our base-case scenario.
Such a scenario would likely restrict the municipality's deficit after capital accounts to below 5% of revenues and curb accumulation of tax-supported debt, which would stay below 30% of consolidated operating revenues at least until 2016.”
