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Sep 10, 2007 14:27 EEST
September 10 (SeeNews) - Global rating agency Standard & Poor's on Monday said it has affirmed the 'BB+'long-term issuer credit rating on the Bulgarian city of Varna with a stable outlook.
“The rating on Varna (…) reflects its low level of financial predictability and flexibility, uncertainty about annual capital expenditure planning resulting in volatile budgets, and high infrastructure needs that will likely trigger an increase in debt over the medium term,” S&P said in a statement.
These factors are mitigated by Varna's improving operating results, currently modest debt level, and the city's diversified and growing economy, the statement said.
The rating agency said a recent change in the country’s constitution in February might give local governments more financial autonomy in the medium term, but the system remained highly centralised and the extent of forthcoming changes remains uncertain.
Varna's operating performance improved significantly in 2006, in line with other Bulgarian municipalities. The operating surplus reached a sound 8.2% of operating revenues, far exceeding the three-year average of 2.3%. The balance after capital expenditures, however, recorded a deficit of 5.6% of total revenues in 2006, due to higher than budgeted capital expenditures. The deficit was financed by reserves from the last bond placement.
Over the next two to three years, the city is expected to post operating surpluses of between 5% and 10% of operating revenue, supported by strong revenue growth, S&P said.
Likely healthy national economic growth should bring a further increase in tax revenue and state transfers over next few years. The development of Varna's balance after capital expenditures is less predictable, owing to a lack of real long-term planning, but the deficit should not exceed 10% of total revenue on average, and will be financed by a combination of new borrowing, asset sales, and state and EU support.
The city prudently utilizes its borrowing capacity to invest in infrastructure, and currently has a low debt level with modest refinancing risk. Debt is expected to grow to about 30% of operating revenue by the end of 2009, and debt service is likely remain below 5% of total revenue in 2007-2009, S&P said.
Varna is a popular tourism center, with a diversified and rapidly developing economy, supported by high levels of domestic and foreign direct investment. Salaries are higher and the unemployment rate lower than the national average.
Bulgaria's accession to the EU in January will support Varna's future development and give impetus to the local economy, S&P said.
The stable outlook on Varna incorporates S&P's expectation that the city will maintain an operating surplus above 5% of operating revenues and be able to finance necessary investment projects without accumulating debt above a moderate level of 35%-40% of revenues over the next two to three years.
The ratings could be positively affected if Varna gains more revenue flexibility from the ongoing legislative changes and continues to achieve stronger operating surpluses above 10% of operating revenue.
The outlook would be revised to negative or the rating could come under pressure, however, should the city's operating performance deteriorate due to growing operating expenditure pressures or to a lower rate of revenue growth, resulting in recurring operating deficits, higher-than-expected financing requirements, and rapidly growing debt.
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