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
