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June 18, 2021

Fitch affirms ratings for Bucharest municipality at “BBB -“, stable outlook

Fitch Ratings on Friday affirmed the Bucharest municipality’s long-term local and foreign currency issuer default ratings (IDRs) at “BBB-,” with stable outlook, informs a press release of the financial assessment agency.

The agency also affirmed the short-term foreign currency IDR at “F3.”

“The affirmation reflects Bucharest’s continuing sound operating performance, moderate debt levels relative to its operating balance and current revenue and sound debt ratios. The ratings also factor in a strong tax base, due to Bucharest’s wealth being substantially greater than the national average. Negatively, the ratings reflect the reliance of operating revenue on economic cycles and uncertainty over contingent liabilities,” says the agency.

Fitch’s baseline scenario forecasts a reduced operating margin of about 15% in the medium term, below Bucharest’s five-year average performance of 26%. This is in line with the city’s 2018 budget, which forecasts an operating margin of 17%. The drop in the operating margin was driven by higher personnel costs following wage increases for public employees and higher current transfers to public institutions, as well as increased spending on goods and services. In Fitch’s view, operating performance will remain sufficient to cover debt servicing and investments scheduled in 2018.

The agency expects the increased operating expenditure to continue, but in our base case the city’s performance 2018-2020 will remain at least in line with that of 2017. Following the last local elections in 2016, an updated and ambitious investment plan was approved. The government aims to further develop the city’s infrastructure and general road infrastructure in particular. However, the realisation rate in 2017 was just 22% and we expect the city’s capex to remain below that envisaged in 2018-2019 (RON1.2 billion and RON1.0 billion, respectively). According to Fitch’s base case, the current margin should cover the city’s capex in 2018-2019.

Bucharest is the capital of Romania and had 1.883 million inhabitants based on the last census in 2011. Local wealth is more than twice the national average and has proved robust through economic cycles, due to Bucharest’s well-diversified economy. Romania’s GDP grew 6.8% in real terms in 2017, and Fitch expects it to have grown by a further 3.8% in 2018 (3% in 2019). Bucharest has a strong labour market, with the unemployment rate at 1.3% in August 2017, significantly below the national average of 4.8%.

Bucharest’s ratings are constrained by Romania’s sovereign ratings (BBB-/Stable/F3). In case of a sovereign upgrade the city could be upgraded if it maintains strong operating performance and sound debt metrics that ensure 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, warns Fitch.

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