October 20, 2014 / 11:02 AM / 3 years ago

Fitch: Polish Region Equalisation System Expires, Impact Varies

(The following statement was released by the rating agency) LONDON, October 20 (Fitch) The expiry of the financial equalisation mechanism for Polish regions should help stabilise the finances of the biggest contributor, the Region of Mazowieckie, Fitch Ratings says. For the biggest beneficiaries, expiry should not affect debt service capability but the full impact on all regions will depend on the replacement system, which is currently subject to political discussion. Transfers under the current system - the janosikowe - will cease from October 2015. Polish legislators missed a 15 October deadline to introduce a replacement mechanism to ensure payments continued after the Constitutional Tribunal ruled that the janosikowe formula was unconstitutional. The Prime Minister has asked the Finance Ministry to speed up preparation of a replacement mechanism for parliamentary approval so equalisation payments can resume from 2016. She has also instructed the Finance Minister to amend his earlier proposal, including a transitional system for 2015, but it is not clear when and how this would be enacted after last week's deadline passed. The Region of Mazowieckie (BBB/Negative), which includes Warsaw, is the biggest contributor to the equalisation mechanism. Payments are Mazowieckie's largest single expenditure item and we estimate that expiry in October 2015 could save between 6% and 8% of operating expenditure for the year. This would ease budgetary pressures and support the financial stabilisation seen in 2014, chiefly due to increased corporate income tax receipts driven by economic growth, and cost savings. Under the suggested transition system, Mazowieckie's contributions would fall by PLN212.5m (USD64m) in 2015 compared with the existing formula, which represents around 11% of operating expenditure. The scale of reductions will be an important factor in the region's credit profile in 2015, potentially enabling Mazowieckie to repay part of a PLN246m state budget loan early, or increase capex for infrastructure. It remains uncertain whether Mazowieckie will have to pay overdue contributions under the janosikowe using a second state budget loan. The Finance Ministry may submit a motion to the Supreme Administrative Court to annul a Regional Administrative Court ruling that it does not have to. This issue will be a key driver of liquidity and debt levels in the near term. Potentially constrained liquidity is one reason that the region's rating is on Negative Outlook. Annual transfers between the regions under the janosikowe, which has been in place for ten years, are worth PLN600m-700m annually in 2014-2015. For the biggest beneficiaries, the Region of Podkarpackie and the Region of Lubelskie, transfers contribute around 16% and 10% respectively of current annual revenue, so a loss of equalisation payments in 4Q15 would cut revenues for the year by 4% and 2.5% respectively. This should not affect debt servicing capacity, but if they do not make up the revenue shortfall from other sources (such as possible grants from the state budget) or adjust operating expenditure, it may lower their operating balances and their ability to implement new investments co-financed by EU grants. For Wielkopolska (A-/Stable) and Malopolska (A-/Stable), the revenue shortfall would be below 1% of current revenue and have no material impact. The Prime Minister's instructions suggest that there will be a drive for equalisation payments to resume in some form, although political agreement might not be straightforward. We may comment further as proposals are made and the legislative process gets underway. Contact: Dorota Dziedzic Director +48 22 338 62 96 Fitch Polska S.A. 16 Krolewska Street Warsaw 00-103 Maurycy Michalski Associate Director +48 22 330 67 01 Magdalena Mikolajczak Analyst +48 22 338 62 85 Mark Brown Senior Director Fitch Wire +44 203 530 1588 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com; Malgorzata Socharska, Warsaw, Tel: +48 22 338 62 81, Email: Malgorzata.Socharska@Fitchratings.com. The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings. Applicable Criteria and Related Research: Region of Wielkopolska here Region of Malopolska here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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