NOTE: On December 11, 2019, the press release was corrected as follows: In the WHAT COULD MOVE THE RATING UP/DOWN section, a fourth paragraph was added. Revised release follows.
Frankfurt am Main, September 10, 2019 -- Moody's Public Sector Europe ("MPSE") has today changed
to positive from stable the outlooks on the City of Belgrade, the
City of Novi Sad, and the City of Valjevo. 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.
At the same time, Moody's has affirmed Belgrade and Novi Sad's
baseline credit assessment (BCA) of ba3, and the b1 BCA of Valjevo.
The change in outlook and the affirmation of the ratings follows a similar
action on the Serbia government's Ba3 bond rating on the 6th of
September 2019. For full details, please refer to the sovereign
press release https://www.moodys.com/research/--PR_409429.
RATINGS RATIONALE
RATIONALE FOR OUTLOOK CHANGE TO POSITIVE AND RATING AFFIRMATION
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.
The sovereign action required the publication of this credit rating action
on a date that deviates from the previously scheduled release date in
the sovereign release calendar, published on www.moodys.com.
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$): 17,555 (2018
Actual) (also known as Per Capita Income)
Real GDP growth (% change): 4.3% (2018 Actual)
(also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 2% (2018
Actual)
Gen. Gov. Financial Balance/GDP: 0.6%
(2018 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: -5.3% (2018 Actual)
(also known as External Balance)
External debt/GDP: 60.9% (2018 Actual)
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
SUMMARY OF MINUTES FROM RATING COMMITTEE
On 05 September 2019, a rating committee was called to discuss the
rating of the Belgrade, City of; Novi Sad, City of;
Valjevo, City of. The main points raised during the discussion
were: The systemic risk in which the issuer operates has materially
decreased.
PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was Regional and Local
Governments published in January 2018. 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.
REGULATORY DISCLOSURES
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 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
review.
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
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Gjorgji Josifov
Asst Vice President - Analyst
Sub-Sovereign Group
Moody's Deutschland GmbH, Czech branch
Washingtonova 17
110 00 Praha 1 (Prague 1)
Prague
Czech Republic
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Mauro Crisafulli
Associate Managing Director
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
