September 11 (SeeNews) - Moody's Public Sector Europe (MPSE) has changed to positive from stable the outlooks on the Serbian cities of Belgrade, Novi Sad, and Valjevo, it said.
Moody's has also affirmed the Ba3 long-term issuer ratings of Belgrade and Novi Sad and the B1 long-term issuer ratings of Valjevo, while keeping the Belgrade and Novi Sad's baseline credit assessment (BCA) of ba3, and the b1 BCA of Valjevo, MPSE said in a statement on Tuesday.
The change in outlook and the affirmation of the ratings follows a similar action on the Serbia government's Ba3 bond rating on September 6, MPSE said.
Moody's also said in the statement:
"Today's outlook change reflects the improving operating environment in Serbia, as reflected by the positive outlook on the sovereign rating. Moody's believes that the country's improved real growth prospects will benefit the cities' income stream and will result in growing proceeds from shared taxes and central government allocations for Serbian cities. As a result, Moody's expects Belgrade and Valjevo's fiscal performance to remain sound with a gross operating balance (GOB) at 12%-14% of operating revenue in 2019-20, while Novi Sad will maintain its strong GOB at around 25% of operating revenue over the same period.
Moody's views the creditworthiness of all three cities as closely linked to that of the sovereign, as Serbian local governments largely depend on revenues that are linked to the sovereign's macroeconomic and fiscal performance. In Serbia, half of municipal revenue is derived from shared taxes (mostly personal income tax) collected within their jurisdiction. Another 10-15% of municipal operating budgets comprise fiscal transfers, mostly non-earmarked and formula-based.
The rating affirmations on Belgrade, Novi Sad, and Valjevo reflect the cities' sound financial fundamentals and good budgetary management, as evidenced by their high self-funding capacity and declining debt burden.
Belgrade's rating is underpinned by its declining and manageable direct debt burden at 44% of operating revenue at year-end 2018 and its crucial role as the capital city and the country's largest economic hub, accounting for almost 40% of national GDP. In addition, the city's limited borrowing requirements and tight control over its municipal sector, will contribute to stabilise its net direct and indirect debt at around 50% of operating revenue in the next two years (against 67% in 2016).
The ratings of Novi Sad and Valjevo are supported by declining and low debt levels (16% and 3.5% of operating revenue, respectively) and adequate liquidity, which mitigates Novi Sad's foreign-currency exposure. Novi Sad's Ba3 rating also takes into account the city's important role in the national economy as the second largest city in the country which supports its revenue base, as well as its greater institutional capacity and its comparatively stronger fiscal management practices than Valjevo.
WHAT COULD MOVE THE RATING UP/DOWN
An upgrade of the sovereign rating would lead to upward pressure on Belgrade, Novi Sad, and Valjevo's ratings, associated with a continuation of the cities' good financial and debt metrics. Moreover, any improvement in the local governments' expenditure flexibility and ability to raise additional own source revenues would be positive.
Although unlikely given the recent outlook change to positive from stable, a deterioration of the sovereign credit strength would apply downward pressure on Belgrade, Novi Sad and Valjevo's ratings given the close financial, institutional and operational linkages between the two tiers of governments. In addition, any significant deterioration in the operating margins of the cities and a significant increase in their debt exposure would exert downward pressure on the current ratings."