Gjorgji Josifov, Assistant Vice President, Analyst of Moody’s: Tightly controlled finances good for the city

On October 25th, Moody’s Public Sector Europe (MPSE) assigned a B1 issuer rating to the City of Belgrade. The role that Belgrade plays in the Serbia’s economy and the city’s prudent budgetary management supported its assigned credit rating and the positive outlook

Moody’s rating agency has recently assigned Belgrade with the B1 credit rating with positive outlook. We spoke with Mr. Gjorgji Josifov, Assistant Vice President/Analyst of Moody’s about the key factors that were in Belgrade favor, possible risks for city’s finances and opportunities for the upgrade of the credit rating.


What contributed to such decision?

— The rating reflects Belgrade’s track record of prudent budgetary management mirrored in sound double-digit operating surpluses and positive financing results, as well as liquidity levels that are above the median for its peer group. The rating is also supported by the important role that the City of Belgrade plays in the national economy as Serbia’s capital and most developed city. These credit strengths are offset by higher debt and debt-service level in excess of the peer group median.

What does the positive outlook on the rating mean? Will it be improved soon? What does the improvement depend on?

— The rating outlook on the city’s rating mirrors the positive outlook on the B1 sovereign rating, reflecting the macroeconomic, institutional and financial linkages between the state and the City of Belgrade. Therefore an upgrade of the City of Belgrade’s rating would require an upgrade of the sovereign rating, associated with maintenance of sound operating margin, sustained balanced financial performance and reduction of its debt. Significant change in the city’s revenue and expenditure flexibility and ability to raise an additional own-source revenues would also have positive implications on the rating.

In the same context, how would you rate the existing and announced national reforms and Belgrade’s efforts in reducing its debt?

— Moody’s expects slight negative implications on the city’s finances due to the changes in the Law on Local Government Finance effective from January 2017. However, the lower proceeds from the Personal Income Tax, expected to represent 2% of operating revenues projected for next year will be offset by the positive national economic growth prospects, which will translate into growing proceeds of shared taxes and own-source revenues that constitute around 40% and 50% of operating revenues respectively. Moody’s regards the city’s direct debt as relatively high, but manageable. In addition, the high proportion of foreign-currency denominated debt adds foreign-exchange risk to its debt repayment profile. However, Moody’s expects that the city’s debt will further decline to around 51% of operating revenues by year-end 2017 from 76% in 2015 and 87% in 2014. This declining trend is driven by the city’s improving financial performance and tightly controlled operating expenditures. It also reflects the Belgrade’s plan to fund most of its capital investment in 2016-17 from its own revenues, asset sales, or central government transfers avoiding as much as possible recourse to new debt.

What are the key risk factors that could jeopardize the city’s rating?

— Any downward movement in the sovereign rating could exert downward pressure on the Belgrade’s rating due to the close macroeconomic, institutional and operational linkages with the central government. Downward pressure on the rating could also occur if the city further materially increases its debt burden and/or suffers a deterioration in its operating and financial performance. In addition, any significant change in the institutional framework under which the Serbian local governments operate, which would severely affect the city’s revenue and expenditure flexibility and ability to raise an additional own-source revenues could also have negative implications on the rating.

How important is for the investors and for the city that a city has been assigned a credit rating?

— Moody’s Public Sector Europe provides the same globally comparable ratings across industry and geography. Moody’s rating is an independent opinion on the future ability of an issuer to make fully and timely payments on its financial commitments. It provides lenders/investors with quick and reliable comparisons of issuers and debt instruments in any market, and it also defines the risk of default and expected loss. At the same time the assigned credit rating provides the city with wider access to the capital markets. It also increases transparency and accountability of city’s operations and corresponding increases in confidence by citizens and other levels of government in the ability of the city to provide sustained good governance.

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