Frankfurt am Main, November 04, 2022 -- Moody's Investors Service ("Moody's") has today affirmed the A2 long-term issuer ratings and (P)A2 senior unsecured MTN program rating of City of Warsaw. The outlook was changed to negative from stable. The city's a3 Baseline Credit Assessment (BCA) was also affirmed.
RATINGS RATIONALE
RATIONALE FOR NEGATIVE OUTLOOK
The negative outlook reflects Moody's view that the changes to Poland's tax and revenue redistribution system (Polski Lad; or Polish Deal) are unfavourable to Warsaw's credit profile. The reduction of personal income tax will reduce the city's revenues by around 15% on a like-for-like basis, leaving the city with less predictable and weaker revenue base. As a result, Moody's expects the city to post significant financial deficits and rising debt levels over the coming two years.
This structural change to Warsaw's revenue base is particularly acute when combined with the risks posed by heightened geopolitical and macroeconomic risks. Although the city has demonstrated strong budget management in the past, Moody's considers that the weakened revenue base – with limited compensation from the Polish government – and growing pressure on operating expenses due to rising prices will make budgetary control more challenging going forward in the context of a less predictable institutional framework.
In 2023 and 2024 Moody's expects a weak operating performance with small operating surpluses of 4% or 1% of operating revenues, which compares with typically double-digit operating surpluses before the pandemic. Due to sizeable capital spending on public transportation, energy efficiency projects and infrastructure, healthcare and education, the city will face larger funding needs, which will drive net direct and indirect debt up to above 50% of operating revenues over the coming two years, from an expected level of around 30% as of year-end 2022. While debt is growing, it is still considered moderate level in an international comparison.
RATIONALE FOR THE AFFIRMATION OF RATINGS
The affirmation of Warsaw's A2 ratings reflects the strengths of the city's credit profile, including its strong and well-diversified economic base, manageable debt levels and a track record of good governance practices. The city offers some more voluntary public services than other Polish cities, which could provide fiscal headroom to adapt its budget if required. Lastly, its current level of liquidity amounts to more than half of the city's outstanding direct debt, providing additional buffer.
ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
The City of Warsaw's ESG Credit Impact Score is neutral-to-low (CIS-2), reflecting neutral-to-low exposure to environmental, social and governance risk.
The environmental issuer profile score is neutral-to-low (E-2), reflecting a moderately negative exposure to water management risks. As for most Polish local governments, Moody's expects budgetary pressure to bring water management facilities up to required standards level.
The neutral-to-low social issuer profile score (S-2) reflects broadly neutral-to-low risks from most social factors, other than demographics (which scores moderately negative), reflecting a general trend of aging population. The city is more exposed to net immigration flows, given its favourable working environment with low unemployment rate and higher average salary than that in the remaining parts of the country. With dynamic immigration, as seen most recently from Ukraine, local housing availability and affordability may come under pressure.
The neutral-to-low issuer profile score (G-2) captures the moderately negative scores of national institutional framework. Against this backdrop Warsaw uses prudent financing planning, which allows for multiyear forecast of key trends, providing the city with the ability to identify potential pressures, and allows for sufficient time to adjust plans accordingly to mitigate any credit implications.
The specific economic indicators, as required by EU regulation, are not available for City of Warsaw. The following national economic indicators are relevant to the sovereign rating, which was used as an input to this credit rating action.
Sovereign Issuer: Poland, Government of
GDP per capita (PPP basis, US$): 37,786 (2021) (also known as Per Capita Income)
Real GDP growth (% change): 5.9% (2021) (also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 8% (2021)
Gen. Gov. Financial Balance/GDP: -1.9% (2021) (also known as Fiscal Balance)
Current Account Balance/GDP: -1.4% (2021) (also known as External Balance)
External debt/GDP: 53.8% (2021)
Economic resiliency: a2
Default history: No default events (on bonds or loans) have been recorded since 1983.
SUMMARY OF MINUTES FROM RATING COMMITTEE
On 02 November 2022, a rating committee was called to discuss the rating of the Warsaw, City of. The main points raised during the discussion were: The issuer's fiscal or financial strength, including its debt profile, has materially decreased. Other views raised included: The issuer's institutions and governance strength, have materially decreased.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
A rating upgrade is currently unlikely because of the assigned negative outlook.
Moody's may consider changing the outlook to stable in case one or a combination of the following occurs: the city achieves better than expected operational results; debt level does not rise materially, and liquidity remains solid; institutional framework becomes more transparent and predictable; compensatory mechanisms reflect fairly the changes triggered by the reforms; an upgrade of the sovereign rating.
Further downward pressure on the rating is possible if: the sovereign rating of Poland is changed to negative outlook or downgraded; operational results of the city deteriorate to even worse levels; debt rises or liquidity depletes faster than currently expected; further unforeseen and financially negative changes are introduced to intergovernmental or taxation legislation; Russian-Ukrainian military conflict spills over into Poland.
The principal methodology used in these ratings was Regional and Local Governments published in January 2018 and available at https://ratings.moodys.com/api/rmc-documents/66129. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of this methodology.
The weighting of all rating factors is described in the methodology used in this credit rating action, if applicable.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found on https://ratings.moodys.com/rating-definitions.
For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the issuer/deal page for the respective issuer on https://ratings.moodys.com.
For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.
The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.
These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website https://ratings.moodys.com.
Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://ratings.moodys.com/documents/PBC_1288235.
The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on https://ratings.moodys.com.
Please see https://ratings.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.
Please see the issuer/deal page on https://ratings.moodys.com for additional regulatory disclosures for each credit rating.
Harald Sperlein
Vice President - Senior Analyst
Sub-Sovereign Group
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main, 60322
Germany
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Mauro Crisafulli
MD - Sub-Sovereigns
Sub-Sovereign Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Releasing Office:
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main, 60322
Germany
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
