January 25, 2007 | Cbonds
|MOSCOW (Standard & Poor's) Jan. 24, 2007--The creditworthiness of Central and |
Eastern European (CEE) local and regional governments (LRGs) continued to
improve in 2006. The positive trend has been supported by strong, although
slowing, revenue growth due to expanding economies and wealth. These
conclusions are set out in the report, "Sector Review: Central And Eastern
European Local And Regional Governments," published today by Standard & Poor's
"The positive trend in creditworthiness has been supported by strong,
although slowing, revenue growth due to expanding economies and wealth," said
Standard & Poor's credit analyst Felix Ejgel. "For all entities except
Bulgarian cities, it has led to solid budgetary performance. It has also
allowed most LRGs either to accumulate cash reserves or to keep capital
expenditures high without significant debt accumulation."
Nevertheless, credit trends and ratings on CEE LRGs continue to be
constrained, largely by low financial flexibility in the light of pressure for
higher quality public services and remaining infrastructure backlogs,
still-developing intergovernmental relations, and largely lower-than-average,
although improving, quality of financial management.
There has been a trend for borrowings to shift to municipal and regional
companies from LRGs. This increases contingent liabilities, but that risk could
be offset by better control over enterprises and overall debt burdens.
"Over the medium term, the creditworthiness of CEE LRGs is likely to
continue improving. With 12 ratings out of 47 on a positive outlook, a
considerable number of upgrades may occur over the next two years, mostly in
Russia and Bulgaria," continued Mr. Ejgel.
The most likely drivers of positive rating actions for Russian LRGs are
the stabilization of intergovernmental relations, improvements in management
sophistication, and infrastructure upgrades. A relatively weaker equalization
system will, however, result in greater divergence in the creditworthiness of
Russian LRGs. The positive trend for ratings on Bulgarian cities will be
contingent on gradual decentralization, which, coupled with consistent
economic growth, may lead to better operating performance in 2007-2008.
In the medium term, ratings on most CEE economic capitals, and Czech and
Polish cities are likely to follow the trajectory of sovereign ratings in
their respective countries. This will be the case if the financing systems
continue stabilizing, and the cities' financial management keeps improving,
especially in the areas of long-term planning, implementation of sizeable
investment projects, and control over contingent liabilities.
"Implementation of the most urgent infrastructure projects will cause
gradual improvement of the overall budget balances and stabilization or even
reduction of the debt burden of Czech and Polish cities," said Mr. Ejgel.
"Russian, Ukrainian, and Bulgarian LRGs, and capitals and economic centers in
other CEE countries are likely to demonstrate the opposite trend, as they will
have to maintain or launch ambitious infrastructure upgrade programs that
require debt financing."