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Rating Action:

Moody's assigns Ba3 rating to the City of Novi Sad and B1 ratings to the Cities of Kraljevo and Valjevo (Serbia)

24 Jun 2010

First-time ratings

Milan, June 24, 2010 -- Moody's Investors Service has today assigned a first-time issuer rating of Ba3 to the Serbian City of Novi Sad as well as B1 ratings to the Cities of Kraljevo and Valjevo. The ratings have a stable outlook.

These ratings are underpinned by the cities' sound overall budgetary performances and limited direct-debt exposure. However, the rating agency cautions that this should be considered in the context of the young and unsettled institutional and financial frameworks that govern Serbian local governments, which might be subject to further adjustments in coming years. The ratings also reflect the cities' constrained revenue and expenditure flexibility and high infrastructure needs, both of which are typical for Serbian municipalities.

"The City of Novi Sad's prudent budgetary management, which underpins its Ba3 rating, is evidenced by stable operating margins, particularly in 2009, when it managed to impose notable cost-cutting measures to mitigate a fall in operating revenue of 8%, driven by economic recession," says Katerina Hanzlova, Moody's lead analyst for Novi Sad and Valjevo. The rating also takes into account the lack of direct debt as well as the city's good cash reserves, which helped to cover the financial deficit it posted in 2009. The deficit was caused by a significant drop in the cyclically sensitive land development fee (a key source of capital revenue), which decreased the city's investment-financing capacity in 2009; this is unlikely to fully recover until 2011. "If investment plans are not scaled down accordingly, the city might be forced to finance them with debt. However, this is not anticipated, at least in 2010," adds Mrs. Hanzlova.

"The City of Kraljevo's rating of B1 reflects its flexible capex implementation strategy, which has enabled it to maintain a balanced budgetary performance and to preserve its direct debt-free status over the past three years," says Miroslav Knazko, a Moody's Assistant Vice President and lead analyst for Kraljevo. "However, Moody's notes that the contraction in the local economy, together with severe cuts in central government transfers have weighed on the city's already volatile operating performance since 2009. Kraljevo will have to tighten expenditures in order to maintain a positive operating performance as key tax revenues are expected to remain constrained by a slow economic recovery," continues Mr. Knazko. Nevertheless, the rating agency does not expect any material changes in Kraljevo's budgetary performances, as the management's cautious capex implementation strategy, which relies heavily on the city's own-source revenue, remains in place and the involvement of debt is still in the early stages. Moreover, these borrowings are not expected to exceed 12% of the city's operating revenue in the foreseeable future, thus the potential debt burden appears to be manageable.

The City of Valjevo's rating of B1 reflects the city's responsible budget and debt management policies over the past four years, which have helped to maintain a balanced financial performance, contained debt levels and manageable debt service. However, the rating remains constrained by the city's dramatically declining, albeit still solid, operating margins, which are influenced by the city's limited revenue and expenditure flexibility. "If the city is able to implement cuts to its operating expenditure in 2010, GOB could stabilise around 20% of operating revenue in 2010, sustained largely by sound tax proceeds," says Mrs. Hanzlova. Moody's notes that it will become increasingly necessary for Valjevo to stabilise its operating margins in the future in order to ensure sufficient debt repayment capacity for its newly planned loan and to finance its investment requirements.

The principal methodologies used in rating the Cities of Novi Sad, Kraljevo, and Valjevo were "Regional and Local Governments Outside the US" and "The Application of Joint Default Analysis to Regional and Local Governments", published respectively in May 2008 and December 2008 and available on www.moodys.com in the Rating Methodologies sub-directory under the Research and Ratings tab. Other methodologies and factors that may have been considered in the process of rating these issuers can also be found in the Rating Methodologies sub-directory on Moody's website.

With almost 300,000 inhabitants, Novi Sad is Serbia's second-largest city. It is the capital of the northern Serbian Autonomous Province of Vojvodina and an important industrial, cultural and financial centre of Serbia. Novi Sad was one of the most developed cities in the former Yugoslavia. The local economy has grown strongly in the past decade, shifting from an industry-driven economy to the tertiary sector. State enterprises went through a privatisation processes and small and medium-size enterprises dominate the city's economy. Positive local economic development is reflected in the comparatively favourable registered unemployment rate (18% in 2009 compared to the national average of 26%).

Kraljevo is located 180 kilometres south of Serbia's capital city of Belgrade and is home to about 120,000 inhabitants. It is the economic and industrial centre of south-west Serbia. Its industrial sector has significantly deteriorated with the country's long-lasting transition from a centrally planned economy. Those remaining industries include the production of cargo trucks, electro-mechanic, food, wood and plastic processing, which all continue to play an important role in the local economy. However, the tertiary sector, dominated by public services, logistics, construction and retail commerce has already become a backbone of the local economy. The relative weakness of the local economy is reflected in a comparatively unfavourable unemployment rate and a lower average income per capita.

The City of Valjevo has almost 100,000 inhabitants and is situated in western Serbia. Its distance from Belgrade is 100 kilometres and it is situated near one of the most important traffic route of the republic -- Ibarska Highway. Valjevo's economy has a long industrial tradition, which has attracted a number of foreign companies. Particularly important for the local economy are small and medium-sized enterprises, private workshops and retail stores. Thanks to its strong industrial base and buoyant local economy, Valjevo has comparatively low registered unemployment rates, 16.5% in 2009 compared to the national average of 26%.

Prague

Miroslav Knazko

Asst Vice President - Analyst

Sub-Sovereign Group

Moody's Investors Service Limited, Branch

Telephone: +420-22-422-2929

Prague

Katerina Hanzlova

Analyst

Sub-Sovereign Group

Moody's Investors Service Limited, Branch

Telephone: +420-22-422-2929

London
David Rubinoff
Managing Director
Sub-Sovereign Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Milan
Massimo Visconti
VP - Senior Credit Officer
Sub-Sovereign Group
Moody's Investors Service
Telephone:+39-02-9148-1100

Moody's assigns Ba3 rating to the City of Novi Sad and B1 ratings to the Cities of Kraljevo and Valjevo (Serbia)
No Related Data.
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