Fitch Affirms Polish City of Gdansk at 'A-'; Outlook Stable
The rating affirmation reflects the city's sound operating performance, as well as strong debt service and debt payback ratios, which Fitch expects to continue over the medium term. The IDRs also reflect the city's solid strategic and financial management, which coupled with sound operating performance, supports a strong self-financing capacity for the city's investment plans.
The Positive Outlook on the National Rating reflects Fitch's view that Gdansk may continue to perform better than the majority of 'AA(pol)' category peers in terms of its operating margin and debt ratios over the medium term.
KEY RATING DRIVERS
In its base case scenario, Fitch expects Gdansk to continue to demonstrate solid operating performance in 2016-2018, with an operating margin of around 13%-14%, in line with the 2010-2015 average. This will be underpinned by the city authorities' continued cost control measures and tax revenue increase, supported by the projected growth of the national economy.
As with other municipalities in Poland, Gdansk launched a central government "Family 500+" programme in April 2016. Although the flow of funds from the central government, inflating both the city's revenue and spending, will be neutral for the operating balance, ratios such as operating and current margins, as well as debt-to-current revenue between 2016 and 2015 will not be comparable.
Gdansk's investments in 2016-2018 could total PLN2bn - on average 20% of annual total expenditure - below 2012-2015 levels, as the city is only beginning to roll out investments under the 2014-2020 EU budget. However, similar to previous years, Fitch expects the city to finance the majority of its capex from the current balance and non-returnable investment grants available to Polish local and regional governments, which will limit Gdansk's recourse to debt.
In 2016, Gdansk does not plan to incur new debt and also intends to repay PLN29m of high interest-bearing debt ahead of schedule as it has done in previous years. The city's direct debt is therefore likely to further decline to about PLN906m by end-2016 (end-1H16: PLN937m).
However, Fitch expects the city's direct debt to return to a growth path from 2017 following investments, but not exceeding 50% of current revenue over the medium term (end-2015: 44%). Fitch projects the city's debt service and debt payback ratios to remain healthy in 2016-2018. Debt servicing (excluding early repayments) will be around 30% of the operating balance and debt payback (debt-to-current balance) is likely to stabilise at around three years (2015: 2.9), which will be well below the city's final debt maturity (up to 21 years).
Historically, Gdansk has had healthy liquidity. During 2015 cash in the city's accounts exceeded debt servicing almost 1.3x (3x when excluding early debt redemption). Fitch expects the city's liquidity to be partly absorbed by investments in 2016-2018, but it should remain sound.
Fitch expects the city's tax revenue to continue to grow in 2016-2018, supported by forecast GDP growth of 3.3% per year. Gdansk is the capital of the Pomorskie region, in northern Poland, and is the largest and wealthiest city in the region, with a well-diversified local economy. Together with Gdynia and Sopot, the city forms a conurbation with about 747,000 inhabitants (source: Central Statistical Office in Poland). The conurbation's gross regional product per capita was above PLN61,847 in 2013 (the seventh-highest among 66 sub-regions, based on the latest available data), and exceeded the national average by 43.8%.
Fitch assesses the regulatory regime for Polish LRGs as neutral. LRGs activities and financial statements are closely monitored and reviewed by the central administration. Disclosure in the LRGs' accounts is more than adequate. 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.
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.
The ratings could be upgraded if the city maintains its operating margin at around 15%, accompanied by direct debt being below 50% of current revenue, on a sustained basis. However, an upgrade of the IDRs would additionally rely on the upgrade of the sovereign ('A-' /Stable), as local and regional governments cannot be rated above the sovereign.
Negative rating action could result from a sustained deterioration of the operating margin to below 10% or a significant rise in Gdansk's direct debt, leading to the city's debt payback ratio exceeding 10 years. Any negative action on Poland's ratings will be reflected on Gdansk's ratings.