Fitch Revises City of Rzeszow's Outlook to Positive; Affirms at 'BBB'
The change of Outlooks reflects Fitch's base case scenario that Rzeszow will continue to improve its operating performance in the medium term, with the operating balance growing to above 10% in 2016-2018 and the debt-to-current balance ratio strengthening to about eight years, despite an expected increase in debt from 2017 as a result of investments.
The ratings reflect the city's medium-sized but rapidly growing local economy as well as solid strategic and financial management. All these strengths translate into healthy operating performance, which supports the city's strong self-financing capacity for investments. The ratings also factor in the city's moderate direct debt.
KEY RATING DRIVERS
The revision of the Outlook reflects the following key rating drivers and their relative weights:
In its base case scenario Fitch's assumes that Rzeszow will further improve its operating performance in 2016-2018. We expect the city's operating balance to grow to around PLN100m, above the 2011-2015 average of PLN56m. This will be driven by continued sound financial management and an effective policy to limit opex growth, and growing tax revenue on the back of local economic growth and a developing tax base.
The city's improved operating results will strengthen the debt-to-current balance ratio to around eight years in 2016-2018, from an average 12 years in 2011-2015. This ratio will compare well with the city's final debt maturity of up to 24 years.
In 2016 the city's capex is likely to more than halve from 2015's PLN367m (30% of total expenditure), leading Fitch to project a small budget surplus. However, for 2017-2018 we expect the city to post a budget deficit of about 1%-3% of total revenue as new investments co-financed from the EU budget 2014-2020 intensify.
In 1H16 Rzeszow posted a large budget surplus of PLN82m (in 1H15: PLN31m budget deficit) due to prolonged delays in launching EU capex programmes at the national level and the receipt of PLN42m of EU refunds on projects completed in 2015.
The city has successfully obtained EU and state grants for infrastructure developments and Fitch expects this to continue during the EU2014-2020 budgetary period. We assume Rzeszow's investment in 2016-2019 will total PLN1bn (on average 25% of annual total expenditure), with almost 80% being funded by capital revenue and current balance, and the remainder by new debt.
Fitch expects the city's debt will remain stable in nominal terms at PLN643m in 2016, before growing from 2017 by PLN50m annually on the back of investments. Debt will, however, remain moderate, at about 66% of current revenue. Rzeszow has secured a new PLN400m EIB loan to be drawn in 2016-2022, with long maturity and a smooth debt repayment profile, which will allow Rzeszow to maintain its healthy debt service ratio. Debt service, projected to average PLN60m in 2016-2018, will be covered 1.6x by the operating balance.
Fitch views management practices as a supportive rating factor. This includes the city authorities' focus on creating conducive conditions for business development in the city and attracting new investors. Rzeszow is seeking to improve the efficiency of its public services delivery, and continuing with its spending rationalisation and cost control.
With about 187,000 inhabitants, Rzeszow is an economic engine of south-east Poland. It has been experiencing accelerated economic growth in the past few years, above the national level, which has led to faster growth of tax revenue than peers. High positive net migration (2014: 2.3 per 1000) and a high birth rate (3.3 per 1000), together with a large student influx, demonstrate the city's attractiveness.
GDP per capita has risen rapidly in the Rzeszow sub-region, in which the city is located, to 87.9% of the national average in 2013 (latest available data) from 74% in 2007. Fitch believes that the city's wealth indicators are above the national average, as the city is the strongest area in the sub-region.
The city's ratings also reflect the following key rating drivers:
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.
The ratings could be upgraded if Rzeszow maintains strong operating balance on a sustained basis, and if diminishing recourse to debt results in an improvement of the debt-to-current balance ratio to below 10 years.