S&P affirms Municipality of Skopje’s rating at BB- with stable outlook

S&P has affirmed its BB- issuer credit rating on the Municipality of Skopje and kept its stable outlook. The agency believes that the municipality will be able to control its operational expenditures and annual operating surpluses will average 20% of operating revenues in 2016-18. The agency also said that the municipality’s debt will increase in the period but only gradually due to the under-execution of capital spending. The agency also said that the stable outlook balances its expectations that the municipality debt will remain low and its view that its strong liquidity position will weaken in the next two years. S&P said that the municipality’s rating is constrained by its volatile institutional framework, weak financial management, weak national economy and its high contingent liabilities. The agency added that the liquidity position of the municipality remains very strong but will likely deteriorate in the near term due to the limited visibility on the potential sales of commercial space.

The agency said it may cut the rating of the municipality if it lowers Macedonia’s sovereign rating or if Skopje liquidity position substantially weakens. The municipality’s budget performance is expected to deteriorate under S&P’s downside scenario and the deficit after capital expenditure may exceed 5% of revenues, the agency said. It warned that the relaxed control of operating expenditures and the increased investments pose a risk to the municipality’s budget. S&P also said it may take positive rating action if revenues from real estate taxes and fees for construction land fees increase and help improve the budgetary performance. Sustained deficits below 5% of revenues and the accumulation of robust cash reserves that are consistently above the annual debt servicing costs may prompt the agency to raise the municipality’s rating. Still the rating is strongly dependent of the sovereign rating of Macedonia and a positive action will be considered only if Macedonia’s sovereign rating is raised.

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