Moody’s Investors Service has downgraded the City of Novi Sad’s issuer rating to B1 from Ba3, and the City of Valjevo’s issuer rating to B2 from B1. The outlook on both ratings remains stable.
The rating actions reflect the more challenging operating environment for Serbian local governments due to the country’s subdued growth prospects and the sovereign’s rising fiscal deficits. These challenges are encapsulated in the B1 rating assigned to the Republic of Serbia on 14 July 2013 (please see Moody’s press release for more information on the sovereign action
RATINGS RATIONALE
The downgrades of Novi Sad and Valjevo reflect the more challenging operating conditions for local governments, resulting from the country’s weakening macroeconomic prospects and the sovereign’s rising fiscal deficits. Both of these factors may prompt the central government to consolidate its finances, and Moody’s notes that any austerity measures may be shared with lower-tier governments in the form of lower state transfers and tax revenues. This is credit negative for both cities, as they are dependent on the central government for a substantial portion of their revenue: 65% of Novi Sad’s operating revenue and around 80% in case of Valjevo over the past few years.
In addition, Novi Sad and Valjevo, like all Serbian cities, do not have sufficient spending flexibility to effectively offset external or internal pressure for a prolonged period of time.
RATIONALE FOR STABLE OUTLOOK
The stable outlook on both ratings reflects the cities’ balanced budgets thus far and mirrors the stable outlook on the sovereign rating.
WHAT COULD CHANGE THE RATINGS UP/DOWN
Any upgrade in the sovereign rating would lead to upward pressure on Novi Sad and Valjevo’s ratings. Moreover, any improvement in the local governments’ expenditure flexibility and ability to raise additional own source revenues would be considered positively.
Any deterioration in Serbia’s rating would likely lead to a downgrade of Novi Sad’s and Valjevo’s ratings. In addition, any significant deterioration in the operating margins of the cities and a further increase in their debt exposure would exert downward pressure on the current ratings.
Specific economic indicators as required by EU regulation are not applicable for this entity.
On 15 July 2013, a rating committee was called to discuss the ratings of the Novi Sad, City of and Valjevo, City of. The main point raised during the discussion was: The systemic risk in which the issuers operate has materially increased.
The principal methodology used in these ratings was Regional and Local Governments published in January 2013.
The weighting of all rating factors is described in the methodology used in this rating action, if applicable.
Source Balkans
