S&P Revises Outlook on Macedonia's Capital Skopje to Stable, Affirms 'BB' Rating

The agency issued the following statement:

“Standard & Poor's Ratings Services said today that it had revised its outlook on Macedonia's capital, Municipality of Skopje, to stable from negative following a similar action on the Republic of Macedonia (foreign currency BB/Stable/B; local currency BB+/Stable/B). At the same time, the long-term issuer credit rating was affirmed at 'BB'.

"The revision of the outlook to stable results from our similar action on the sovereign," said Standard & Poor's credit analyst Jean-Louis Renaud.

The rating on Skopje reflects our opinion that the municipality's fiscal flexibility is extremely limited as a result of the initial stages of fiscal decentralization.

Low wealth levels, obstacles to local economic development, and contingent liabilities arising from the municipality's companies also constrain the rating.

These factors are mitigated by the absence of direct debt held by Skopje and only marginal quantities of tax-supported debt, recent revenue growth stemming from initial stages of fiscal decentralization, and an accumulated fiscal surplus.

"The stable outlook reflects our anticipation of a slight contraction of Skopje's hitherto strong operating surpluses, which we nevertheless believe should permit the municipality to carry out infrastructure-related investments without further debt accumulation beyond the level planned for 2009," said Mr. Renaud.

However, if the municipality accelerates its capital-expenditure program, or if its capacity to generate operating surpluses is eroded beyond our expectations, leading to a sharp and rapid accumulation of debt beyond what we anticipate, it could result in our lowering the rating. The rating could also come under pressure depending on
the municipality's potential repayment schedule and foreign currency exposure resulting from any possible borrowing plan.

Conversely, assuming we were to raise the sovereign rating, we could also raise the rating if the central government substantially increases the municipality's ability to self-finance infrastructure-related investments, and the municipality remains committed to sound financial performance.”