OREANDA-NEWS. Fitch Ratings has affirmed the Romanian City of Bucharest's Long-Term Foreign Currency Issuer Default Rating (IDR) at 'BBB-' and Long-Term Local Currency IDR at 'BBB' and Short-Term Foreign Currency IDR at 'F3'. The Outlooks on the Long-Term IDRs are Stable.

The affirmation reflects Bucharest's strong operating performance, debt and debt servicing ratios in line with the rating and its strong tax base. The ratings also consider Bucharest's function as an economic and financial centre and wealth far above the national average. They also reflect high investment needs and uncertainties about contingent liabilities.

KEY RATING DRIVERS

At 28.6%, the 2015 operating margin was in line with that of 2014, well in line with the five-year average performance of 29% and sufficient to pre-finance the city's investments realised at this time. The current balance covered the city's capital expenditure by 150%, while the operating balance covered interest paid by at least 10x.

Fitch's baseline scenario is that the city's performance will remain stable in 2016-2018. Bucharest is less reliant on central government VAT transfers and should not be particularly affected by the cut of the VAT base rate by 4pp to 20% in 2016. Following the local elections that took place nationally in June 2016, there is a new mayor and some uncertainties remain around capex. The government aims to further develop the city's infrastructure and particularly general road infrastructure but no investment plan for 2017 is under consideration.

Direct risk increased by RON180m to RON2,986m at end-2015. This corresponds to 2.9 years of the current balance and a direct risk-to-current revenue ratio of 75% (2014: 76%). Interest expenditure was a low 2.9% of operating revenue in 2015 and annual debt service was just 5.8% of current revenue. Debt servicing is supported by the city's liquidity held on the treasury account, which was RON533m in 2015. Our base case does not expect Bucharest to increase its direct debt in 2016-2018 and consequently it will remain around RON3bn.

The city's debt is prudently managed and its debt servicing ratio of 8.5% at end-2015 was well below the statutory limit of 30%.

At end-2015, Bucharest was exposed to around RON131m of debt service and guarantees at two wholly-owned companies and one minority shareholding. Bucharest is further exposed to the independent energy company, Radet, which had liabilities of RON3.7bn to SC Electrocentrale Bucuresti SA at end-2015, consisting of heating consumption bills, current penalties and penalties subject to a final court ruling.

Local wealth is more than 2x the national average and robust through economic cycles due to the well-diversified economy. Romania's GDP grew 3.7% in real terms in 2015 and Fitch expects further growth of 4% (2017: 3.4%) in 2016. Bucharest has a robust employment market and the unemployment rate was 1.9% at end-2015, significantly below the national average of 6.8%.

Local governments in Romania have heavy government control and supervision. They are obliged to provide an annual report together with a balance sheet, an annual budget and a multi-year forecast. The local budget has to be approved by the local councils and all debt and guaranteed debt has to be approved by the committee for authorisation of local debt. Local governments' financial flexibility is limited, as the state controls the main revenue sources, with personal income tax and VAT together accounting for about 70% of local budgets. The state controls the main expenditure item, salaries, which make up about 40% of current spending.

RATING SENSITIVITIES

Bucharest's ratings are constrained by the sovereign's ratings. In case of a sovereign upgrade the city could be upgraded if it maintains a strong operating performance and sound debt metrics that ensures investments are largely funded by internal resources.

A significant increase in debt pressure due to deteriorating operating performance or recognition of contingent liabilities linked to the city's public-sector entities as direct debt would trigger a downgrade.