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Rating Action:

Moody's upgrades three Serbian cities' ratings; outlooks stable

16 Mar 2021

Frankfurt am Main, March 16, 2021 -- Moody's Public Sector Europe ("Moody's") has today upgraded to Ba2 from Ba3 the long-term issuer ratings of the City of Belgrade and the City of Novi Sad. The long-term issuer ratings of the City of Valjevo were upgraded to Ba3 from B1. Issuer outlooks on the three cities were changed to stable from positive.

At the same time, Moody's has upgraded Belgrade and Novi Sad's Baseline Credit Assessments (BCA) to ba2 from ba3 and the BCA of Valjevo to ba3 from b1.

Today's rating action follows the upgrade of the Government of Serbia's sovereign rating to Ba2 from Ba3 with a stable outlook. For further information, refer to the sovereign press release: https://www.moodys.com/research/Moodys-upgrades-Serbias-ratings-to-Ba2-outlook-stable--PR_440418

Please click on this link https://www.moodys.com/viewresearchdoc.aspx?docid=PBC_ARFTL442314 for the List of Affected Credit Ratings. This list is an integral part of this Press Release and identifies each affected issuer.

RATINGS RATIONALE

-- RATIONALE FOR THE RATINGS UPGRADE

Moody's rating action on the cities of Belgrade, Novi Sad and Valjevo reflects: (1) the improvement in the sovereign creditworthiness, which Serbian sub-sovereigns benefit from; and (2) the cities' continued good governance and budgetary management practices and solid financial fundamentals, which will withstand the impact of the coronavirus pandemic-induced shock. Moody's expects that the cities' robust financial position will be largely preserved, with debt burdens declining further from moderate or very low levels.

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. After being marginally affected by last year's economic contraction, the shared personal income tax (PIT), which constitutes around 50% of the Serbian cities' operating revenue, will increase by 6% in 2021 as a result of the economic growth of 4.7% estimated in 2021. Another 10-15% of municipal operating budgets comprise fiscal transfers, mostly non-earmarked, which Moody's forecasts to remain broadly stable.

Belgrade's rating is underpinned by its robust financial performance supported by strong fiscal management. The city is projected to register a financial surplus for 2020, contributing to a declining direct debt burden projected at 34% of operating revenue at year-end 2020. The rating is also underpinned by Belgrade's 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 companies, will contribute to stabilising its net direct and indirect debt at around 40% of operating revenue in the next two years (against 67% in 2016).

Novi Sad's and Valjevo's ratings upgrades also reflect their strong operating performance with Novi Sad's gross operating balance (GOB) averaging 19% of operating revenue over the last five years while Valjevo's GOB averaged 17% over the same period. Moody's expects such operating balances will shield the cities' budgets from the negative effects of the coronavirus pandemic and future potential shocks. As a result of the positive economic growth prospects in 2021 and 2022, which will translate into growing proceeds from shared taxes and local taxes and fees, Moody's forecasts Novi Sad and Valjevo's GOBs to remain strong at around 21% and 15% of operating revenue in 2021 and 2022, respectively.

The rating of Novi Sad is supported by declining and low debt levels (11% of operating revenue at year-end 2020) and ample liquidity, which covers almost 2x of the city's outstanding debt and mitigates its foreign-currency exposure. Meanwhile, Valjevo fully repaid its debt in 2020 and will remain debt free in 2021 as the city does not plan to take on new debt. Novi Sad's Ba2 long-term issuer 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, and its strong fiscal management practices, reflected in its operating performance. Valjevo's rating also incorporates its smaller economic size and more limited ability to generate revenues.

--RATIONALE FOR STABLE OUTLOOKS

The stable outlook on the Serbian cities' ratings mirrors the stable outlook on the sovereign rating. They also reflect Moody's expectation that the cities will be able to preserve their overall solid and stable financial performance, and moderate-to-low debt levels. The cities' history of prudent budgetary management further supports the stable outlook.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS

Environmental considerations are not material to Belgrade, Novi Sad and Valjevo's credit profiles. Their main environmental risk exposures relate to floods. However, as evidenced during the floods in 2014, in the event of natural disasters, the national government would provide support and bear most of the costs of recovery and reconstruction at the local level.

Social considerations are material to Serbian cities. Belgrade and Novi Sad are more specifically exposed to the evolution of their demography, with its population exposed to net immigration flows. The population growth is putting some strain to the cities' budgets to meet the infrastructure and housing needs. The City of Valjevo has lost 13% of population since 1991, but the decline slowed in the recent years.

Governance considerations are material to Serbian cities' credit profiles. While the cities have moderate fiscal flexibility, they follow prudent budgetary management practices. Belgrade and Novi Sad use prudent financing planning, which allows for multiyear forecasting of key trends, providing the cities with the ability to identify potential pressures and allowing for sufficient time to adjust plans to mitigate any credit implications.

The specific economic indicators, as required by EU regulation, are not available for Belgrade, City of; Novi Sad, City of; Valjevo, City of. 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$): 18,972 (2019 Actual) (also known as Per Capita Income)

Real GDP growth (% change): 4.2% (2019 Actual) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): 1.9% (2019 Actual)

Gen. Gov. Financial Balance/GDP: -0.2% (2019 Actual) (also known as Fiscal Balance)

Current Account Balance/GDP: -6.9% (2019 Actual) (also known as External Balance)

External debt/GDP: 61.5% (2019 Actual)

Economic resiliency: baa3

Default history: At least one default event (on bonds and/or loans) has been recorded since 1983

SUMMARY OF MINUTES FROM RATING COMMITTEE

On 11 March 2021, a rating committee was called to discuss the rating of the Belgrade, City of; Novi Sad, City of; Valjevo, City of.

For Belgrade, the main points raised during the discussion were: the issuer's institutions and governance strength, have materially increased; and the systemic risk in which the issuer operates has materially decreased. For Novi Sad, the main points raised during the discussion were: the issuer's institutions and governance strength, have materially increased; and the systemic risk in which the issuer operates has materially decreased. For Valjevo, the main points raised during the discussion were: the systemic risk in which the issuer operates has materially decreased.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Given the limited fiscal autonomy and market insulation of the cities, an upgrade of Belgrade and Novi Sad's ratings would require an upgrade of Serbia's sovereign rating. In addition, the cities' ultimate dependence on the central government is underpinned by the sovereign's ability to change the institutional framework under which Serbian sub-sovereigns operate. This prevents the City of Belgrade and the City of Novi Sad being rated above the sovereign. An upgrade of Serbia's sovereign rating associated with a continuation of solid budgetary performance, moderate-to-low debt levels and adequate liquidity levels would likely point to an upgrade of the cities' ratings. Additionally for Valjevo, a strengthening in financial management and performance along with stronger revenue generation ability would also put upward pressure on its rating.

Although unlikely given the recent sovereign upgrade, a deterioration of the sovereign credit strength would apply downward pressure on cities' ratings given the close financial, institutional and operational linkages between the two tiers of governments. Significant financial deterioration driven by reduced operating margins, an unexpected sharp increase in debt as well as the emergence of liquidity risks, would also exert downward pressure on the ratings.

The sovereign action on Serbia published on Friday, 12 March 2021 required the publication of these credit rating actions on a date that deviates from the previously scheduled release date in the sovereign release calendar, published on www.moodys.com.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Regional and Local Governments published in January 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1091595. Alternatively, 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

The List of Affected Credit Ratings announced here are a mix of solicited and unsolicited credit ratings. Additionally, the List of Affected Credit Ratings includes additional disclosures that vary with regard to some of the ratings. Please click on this link https://www.moodys.com/viewresearchdoc.aspx?docid=PBC_ARFTL442314 for the List of Affected Credit Ratings. This list is an integral part of this Press Release and provides, for each of the credit ratings covered, Moody's disclosures on the following items:

• EU Endorsement Status

• UK Endorsement Status

• Rating Solicitation

• Issuer Participation

• Participation: Access to Management

• Participation: Access to Internal Documents

• Disclosure to Rated Entity

• Lead Analyst

• Releasing Office

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 at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

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.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.

At least one ESG consideration was material to the credit rating action(s) announced and described above.

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 www.moodys.com.

The below contact information is provided for information purposes only. Please see the ratings tab of the issuer page at www.moodys.com, for each of the ratings covered, Moody's disclosures on the lead rating analyst and the Moody's legal entity that has issued the ratings.

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.

Harald Sperlein
Vice President - Senior Analyst
Sub-Sovereign
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
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

No Related Data.
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