Fitch affirms Bucharest municipality ratings at 'BBB-' with stable outlook

Fitch Ratings on Friday affirmed the Romanian City of Bucharest's Long-Term Local- and Foreign-Currency Issuer Default Ratings (IDRs) at 'BBB-' with stable outlook, according to a release of this financial rating agency. 

Moreover, the rating 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 the city's 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 uncertainty over contingent liabilities," appreciated the financial rating agency. 

Fitch's baseline scenario forecasts a reduced operating margin of above 15% in the medium term, below Bucharest's five-year average of 26%. This is in line with the city's preliminary 2018 results, which showed an operating margin of 13.6%. 

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 and for social assistance. According to Fitch, the operating performance will remain sufficient to cover debt servicing and a large part of the investments scheduled in 2019. 

Fitch expects the operating expenditure to continue increasing, but our base case projects the city's performance 2018-2020 to remain at least in line with that of 2018. The city faces high investment needs to cope with a growing population and the local authorities' plan to further develop the city's infrastructure and, in particular, general road infrastructure. 

The agency also expects the city's capex to remain slightly below that envisaged in 2019 (RON1 billion), while the current margin should cover the city's capex in 2019-2020 and, according to the city authorities, scheduled investments would not be financed by debt. 

Bucharest is the capital of Romania and had 1.88 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 6.9% in real terms in 2017, and Fitch expects it to have grown by a further 3.8% in 2018 (3.5% in 2019). Bucharest has a strong labour market, with an unemployment rate at 1.3% in August 2018, significantly below the national average of 4.3%. 

Bucharest's ratings are constrained by the sovereign's ratings. A sovereign upgrade would be reflected in the city's ratings provided Bucharest maintains strong operating performance and sound debt metrics with investments largely funded by internal resources, reads the same release 

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.