Note: On July 06, 2017, the press release was corrected as follows: the location for the first contact was updated to “Moody's Investors Service EMEA Limited Czech Branch.” Revised release follows.
London, 25 October 2016 -- Moody's Public Sector Europe (MPSE) has today assigned a B1 issuer rating
to the City of Belgrade. The outlook on the rating is positive.
The B1 rating reflects the city's:
(1) prudent budgetary management, characterized by sound operating
(2) continuing comfortable cash reserves
(3) relatively high but declining debt burden
(4) crucial role in the national economy
The first driver supporting the rating is the Belgrade's sound fiscal
performances, with double-digit operating surpluses recorded
over the last five years. In 2015, the city's gross
operating balance-to-operating revenue ratio stood at 12%
in line with the performance in 2014. In 2016 and 2017, Moody's
expects Belgrade's operating margin to improve to 14% and
16% of operating revenue respectively, attributable to combined
effect of (1) the positive national economic growth prospects, which
will translate into growing proceeds of shared taxes, coupled with
increased collection of property tax and own-source non-tax
revenues; and (2) slower growth in operating expenditures.
According to Moody's, the improvement in the operating margins,
combined with a drop in capital expenditure, led to a financing
surplus between 3%-7% of total revenues during 2013-15,
compared with a financing deficit of 7% in 2012 and 18%
in 2011. However, the City of Belgrade's capital investment
plan for 2016-17 envisages large capital investments, which
if fully implemented could trigger the city's financing result to
revert into negative territory.
The second driver is Moody's view that the city's cash reserves
will remain above RSD10 billion and represent a cushion well in excess
of Belgrade's debt service requirements in 2017. Moody's
says that Belgrade's sound financial performance has led to a comfortable
liquidity position. Its accumulated cash reserves averaged 17%
of operating revenues in the first three quarters of 2016, representing
1.5x of projected debt servicing costs.
The third driver is the City of Belgrade's relatively high debt,
although its net direct and indirect debt levels declined to 85%
of operating revenue from 101% in 2014. Moody's expects
that the city's debt will further decline to around 58% of
operating revenues by year-end 2017 following the city's
commitment to fund the majority of its investment programme from the operating
margin, asset sale or central government transfers. A high
FX exposure represents an additional financial risk for the City of Belgrade
as 87% of the city's debt was denominated in euros at year-end
2015. However, Moody's notes that the city's
debt burden will remain manageable with annual debt repayments at around
9% of total revenues during 2016-17.
The fourth driver is the important role Belgrade plays in the national
economy as Serbia's capital and most developed city. The
local economy is dynamic and much more diversified than other Serbian
cities, limiting its exposure to economic cycles. The city
is of central strategic importance to the Serbian economy and it is the
country's largest economic hub, accounting for about 39%
of national GDP. With 1.7 million residents, accounting
for approximately 24% of Serbia's population in 2015, Belgrade
is the country's largest labour market. Belgrade's relative
affluence is evident in its GDP per capita, which is 70%
above the national average.
RATIONALE FOR POSITIVE OUTLOOK
The rating outlook mirrors the positive outlook on the B1 sovereign rating,
reflecting the macroeconomic and financial linkages between the state
and local governments in Serbia. Belgrade is dependent on intergovernmental
revenues in the form of shared taxes, which represent around 55%
of operating revenue. In addition, the institutional linkages
intensify the close ties between the two levels of government through
the sovereign's ability to change the institutional framework,
under which the Serbian sub-sovereigns operate.
WHAT COULD CHANGE THE RATINGS UP/DOWN
Upgrade of the City of Belgrade's rating would require an upgrade
of the sovereign rating, associated with maintenance of sound operating
margin and sustained balanced financial performance. Significant
change in the city's revenue and expenditure flexibility and ability
to raise an additional own-source revenues would also have positive
implications on the rating.
Any downward movement in the sovereign rating could exert downward pressure
on the Belgrade's rating due to the close macroeconomic and operational
linkages with the central government. Downward pressure on the
rating could also occur if the city (1) further materially increases its
debt burden; and/or (2) suffers a deterioration in its operating
and financial performance.
The specific economic indicators, as required by EU regulation,
are not available for these entities. The following national economic
indicators are relevant to the sovereign rating, which was used
as an input to this credit rating action.
Sovereign Issuer: Serbia, Government of
GDP per capita (PPP basis, US$): 13,671 (2015
Actual) (also known as Per Capita Income)
Real GDP growth (% change): 0.7% (2015 Actual)
(also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 1.6%
Gen. Gov. Financial Balance/GDP: -3.8%
(2015 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: -4.8% (2015 Actual)
(also known as External Balance)
External debt/GDP: [not available]
Level of economic development: Moderate level of economic resilience
Default history: At least one default event (on bonds and/or loans)
has been recorded since 1983*.
*Events related to the debts of the Former Yugoslavia
On 21 October 2016, a rating committee was called to discuss the
rating of the Belgrade, City of. The main points raised during
the discussion were: The issuer's economic fundamentals, including
its economic strength. The issuer's institutional strength/framework.
The issuer's governance and/or management. The issuer's fiscal
or financial strength, including its debt profile. The systemic
risk in which the issuer operates. The susceptibility to event
The principal methodology used in this rating was Regional and Local Governments
published in January 2013. Please see the Rating Methodologies
page on www.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.
For ratings issued on a program, series or category/class of debt,
this announcement provides certain regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt 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 ratings tab on the issuer/entity page for the
respective issuer on www.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.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Asst Vice President - Analyst
Moody's Investors Service EMEA Limited Czech Branch
110 00 Praha 1 (Prague 1)
Associate Managing Director
Moody's Investors Service EMEA Ltd.
One Canada Square
London E14 5FA
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