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Rating Action:

Moody's changes outlook to positive on City of Budapest; Ba1 rating affirmed

09 Nov 2015

London, 09 November 2015 -- Moody's Public Sector Europe ("MPSE") has today changed to positive from stable the outlook on the City of Budapest. MPSE has also affirmed the city's Ba1 rating.

The main drivers of the rating action are (1) the improving Hungarian operating environment, as reflected in Moody's outlook change on Hungary's Ba1 government bond rating to positive from stable; and (2) the strong correlation between sovereign and sub-sovereign credit risk, reflected in macroeconomic and financial linkages as well as in institutional factors.

The change in outlook and the affirmation follow similar actions on Hungary's government bond rating on 6 November 2015. For full details, please refer to the sovereign press release:

https://www.moodys.com/research/--PR_337832

RATINGS RATIONALE

Today's outlook change reflects the improving operating environment of Hungary, as reflected by the positive outlook on the sovereign rating.

The outlook change also reflects Moody's view that the creditworthiness of Budapest is closely linked to that of the sovereign, as Hungarian local governments depend on revenues that are linked to the sovereign's macroeconomic and fiscal performance. Approximately 70% of Budapest's operating revenues in 2014 were from intergovernmental revenues, in the form of shared taxes and central government transfers that are set at the national level.

Moody's expects that the comparatively good national economic growth will be sustained. This will result in growing central government allocations, which will be a positive for the city's income stream.

RATIONALE FOR RATING AFFIRMATION

The affirmation of Budapest's Ba1 rating reflects the city's proven track record of prudent budgetary management, as mirrored by its solid operating surpluses and good financial performance.

Budapest's rating is underpinned by almost zero net direct and indirect debt, which is a result of the decision of Hungarian central government to cut public debt within its efforts to consolidate municipal finances. As such, Budapest's net debt fell to a very low 3% of operating revenues in 2015 from 97% in 2012.

Moody's also notes that the Ba1 rating reflects Budapest's strong liquidity and sound governance and management practices, as well as its strong internal budget procedures.

WHAT COULD CHANGE THE RATINGS UP/DOWN

Upward pressure on Budapest's rating could arise from an upgrade of the sovereign rating associated with continued solid operating performance and strong liquidity position.

Downward pressure on the rating could result from a downgrade of Hungary's sovereign rating; and/or a material deterioration in the city's operating and financial performance.

The publication of this rating action deviates from the previously scheduled release date in the sovereign release calendar published on www.moodys.com. The reason for the deviation is the rating action on the sovereign rating.

The specific economic indicators, as required by EU regulation, are not available for this entity. The following national economic indicators are relevant to the sovereign rating, which was used as an input to this credit rating action.

Sovereign Issuer: Hungary, Government of

GDP per capita (PPP basis, US$): 25,019 (2014 Actual) (also known as Per Capita Income)

Real GDP growth (% change): 3.7% (2014 Actual) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): -0.9% (2014 Actual)

Gen. Gov. Financial Balance/GDP: -2.5% (2014 Actual) (also known as Fiscal Balance)

Current Account Balance/GDP: 2.3% (2014 Actual) (also known as External Balance)

External debt/GDP: [not available]

Level of economic development: High level of economic resilience

Default history: No default events (on bonds or loans) have been recorded since 1983.

On 05 November 2015, a rating committee was called to discuss the rating of the Budapest, City of. The main points raised during the discussion were: The issuer's institutional strength/ framework, have not materially changed. The systemic risk in which the issuer operates has materially decreased.

The principal methodology used in these ratings was Regional and Local Governments published in January 2013. Please see the Credit Policy 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 rating action, if applicable.

REGULATORY DISCLOSURES

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 rating action on the support provider and in relation to each particular 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 rating action, and whose ratings may change as a result of this 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.

Katerina Hanzlova
Analyst
Sub-Sovereign Group
MIS EMEA Limited Czech Branch
Washingtonova 17
110 00 Praha 1 (Prague 1)
Prague
Czech Republic
Telephone: +420-22-422-2929

David Rubinoff
MD - Sub-Sovereigns
Sub-Sovereign Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Releasing Office:
Moody's Investors Service EMEA Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's changes outlook to positive on City of Budapest; Ba1 rating affirmed
No Related Data.
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