Fitch Upgrades Polish City of Gliwice to 'A-'; Outlook Stable
OREANDA-NEWS. Fitch Ratings has upgraded the Polish City of Gliwice's Long-term foreign and local currency Issuer Default Ratings (IDR) to 'A-' from 'BBB+' and National Long-term rating to 'AA-(pol)' from 'A+(pol)'. The Outlooks are Stable.
The upgrade reflects Gliwice's continued sound operating performance and prudent financial management, which together with a high share of earmarked capital grants and healthy liquidity, support the implementation of the city's investment plans. The ratings also factor in healthy debt ratios and debt-to-current revenue well below 50%.
The Stable Outlook reflects Fitch's expectations that the strong operating performance will be maintained in the medium term, despite pressure on operating spending.
KEY RATING DRIVERS
The rating action reflects the following rating drivers and their relative weights:
In 2015 Gliwice posted a high operating margin of 15.7% (2014: 16.7%), which was above our expectations and above the average of 2010-2014 (12.7%). This result was supported by among other things, higher than budgeted tax revenue, especially from personal income tax, as well as continued strict monitoring and rationalisation of spending. High operating balance and proceeds from asset sales allowed the city to generate a surplus of PLN54m in 2015 (4% of total revenue), despite significant capex.
Fitch expects Gliwice to continue to demonstrate solid operating performance in 2016-2018, with an operating margin around 14%. This will be underpinned by its financial flexibility and the city authorities' effective policy to limit opex growth, coupled with increasing revenue from income and property taxes, supported by the expansion of the city's tax base. Like all municipalities in Poland, Gliwice launched a central government "Family 500+" programme in April 2016. Although the flow of funds from the central government, inflating both sides of the budgets, will be neutral for the operating balance, the ratio comparison for operating and current margins, as well as debt to current revenue between 2016 and 2015 will be limited.
Fitch's base case scenario for 2016-2018 envisages Gliwice's investment spending declining to 25% of total spending on average, from a high 44% in 2012-2015, when the city was implementing a large regional motorway co-financed by state and EU investment grants. Currently the city is preparing to roll-out new investments under the 2014-2020 EU budget. However, similar to previous years Fitch expects the city to finance majority of its capex from the current balance, proceeds from asset sales and non-returnable investment grants available to Polish local and regional governments (LRGs), which will limit Gliwce's recourse to debt.
Fitch's base case scenario expects the city's direct debt to hover around 35%-40% of current revenue in 2016-2018, up from 33% or PLN291m at end- 2015. This level of debt should not put much pressure on Gliwice's budget, due to the city's continued solid budgetary performance and the dominance of low-cost and long-term financing from the European Investment Bank.
Fitch projects the city's debt service and debt payback ratios, despite debt growth, will remain strong in 2016-2018. Debt servicing will be around 15% of the operating balance and debt-to- current balance about three years (2015: 2.1), still well below the city's final debt maturity of 18 years.
The city's authorities follow a prudent budgetary and financial policy, which guarantees a solid operating performance despite persistently high pressure on operating expenditure. Much of the operating expenditure pressure arises from under-funded responsibilities that were transferred to local governments by the state in the past and from the dominance of rigid spending items such as education and social care. Additionally, pressure on the budget comes from growing maintenance costs as investments are being completed.
The rating action also reflects the following key rating drivers:
The regulatory regime for Polish LRGs is relatively stable. Their activities and financial statements are closely monitored and reviewed by the central administration. There is good disclosure in the LRGs' accounts. The main revenue sources such as income tax revenue, transfers and subsidies from the central government are centrally distributed according to a legally defined formula, which limits the central government's scope for discretion. Additionally, local tax rates such as real estate tax, which some LRGs are entitled to collect, are capped by the state. This makes LRGs reliant to some extent on decisions made by the central government and limits their revenue-raising flexibility.
With a population of 184,415 at end-2014 (Central Statistical Office data), Gliwice is a medium-sized city by Polish standards located in the Slaskie region. The city's economy is well developed and is attractive to investors, as it benefits from the city's location at the cross-roads of the main Polish rail and road corridors, and from its well-educated and highly qualified labour force. The GDP per capita in 2013 (last available data) for the Gliwicki sub-region, which includes Gliwice and surrounding cities and villages, was 118.4% of the national average.
The ratings could be upgraded if Gliwice maintains sound operating performance leading to debt payback below two years on a sustained basis.
Conversely a downgrade could result from material deterioration in operating performance leading to operating margin decline below 10% on a permanent basis.
- Fitch expects the city to continue its efficient operating expenditure growth control and to manage the budget prudently in the medium term.
- Fitch assumes that the city will continue to receive EU funds to co-finance its investment programme.
- Fitch assumes that any new delegated tasks from the central government will be neutral to the city's operating budget.
- Fitch also assumes that the city will continue to comply with all the EU regulations and procedures when implementing investments projects co-financed by the EU. Otherwise, Gliwice could face the penalty of having to return previously received EU grants.