(The following statement was released by the rating agency)
Jan 09 -
Summary analysis -- Minsk (City of) ------------------------------- 09-Jan-2013
CREDIT RATING: B-/Stable/-- Country: Belarus
Primary SIC: Legislative
Credit Rating History:
Local currency Foreign currency
28-Sep-2011 B-/-- B-/--
16-Mar-2011 B/-- B/--
29-Dec-2010 B+/-- B+/--
The rating on the Belarusian capital City of Minsk reflects Standard & Poor’s Ratings Services’ view of the city’s very limited budget predictability and flexibility, its large infrastructure needs, and high contingent liabilities. Factors supporting the rating are its low debt burden, very strong operating performance, and the city’s position as the country’s key administrative, financial, and commercial center.
The rating on Minsk is capped at ‘B-’ by the sovereign foreign currency rating on Belarus, according to our assessment of the framework for intergovernmental relationships between the central government and its local and regional governments (LRGs) in Belarus. In Belarus’ situation, we believe that a Belarusian LRG cannot be rated above the sovereign. However, in accordance with our criteria, we have assigned an “indicative credit level” (ICL) of ‘b+’ to Minsk (see “Methodology For Rating International Local And Regional Governments”, published Sept. 20, 2010, on RatingsDirect on the Global Credit Portal).
The ICL is not a rating. It is a means of assessing an LRG’s intrinsic creditworthiness under the assumption that there is no sovereign rating cap. The ICL results from the combination of our assessment of an LRG’s individual credit profile and the effects we see of the institutional framework within which it operates.
We believe that the institutional framework within which Belarusian regional governments operate is very centralized and evolving, which limits the predictability and flexibility of Minsk’s financial policy. The central government defines the types, rates, and bases of most taxes, sets norms of regional spending through established social standards, limits regions’ budget deficits, and authorizes all borrowings.
As Belarus’ largest administrative, financial, and commercial center, Minsk is wealthy and diversified relative to other Belarusian regions, and we expect this will continue to support its budgetary performance. Although the city’s wealth levels are modest by international standards, the city’s GDP per capita exceeds the national average by 1.5x.
Post-crisis economic recovery and a significant depreciation of the Belarusian ruble in 2011-2012 have triggered higher inflation and supported Minsk’s revenue growth and resulted in exceptionally solid operating margins of 35% of operating revenues. Given the concentration of the national economic growth in Minsk and the relatively high inflation, the city’s revenue growth will likely continue to exceed operating spending growth rates in the medium term. This will result in strong operating margins of over 25% on average in 2012-2015 according to our base-case expectations.
We note that private investment in Minsk is limited, compelling the city to maintain high capital spending itself, both directly and via municipal companies, which exposes it to large contingent liabilities. Minsk has also committed to an ambitious housing construction program and large-scale infrastructure upgrade ahead of hosting the World Ice Hockey Championship in 2014. This puts pressure on the city’s investment budget. However, given that the central government has required Belarusian LRGs to deliver zero deficits in 2012-2013, the city will deliver budget surpluses after capital accounts. We do not exclude that this legal constraint might be relaxed after 2013. However, on average, deficits after capital accounts will be limited in the medium term, at about 2%-3% of total revenues.
Due to solid operating performance and legal limits on direct borrowings, the city’s tax-supported debt will likely stay below 30% of operating revenues in the medium term. The larger share of the debt burden (over 70%) will consist of guarantees against municipal companies’ borrowings, according to our base case. By year-end 2012, tax-supported debt (according to Standard & Poor’s criteria) was a low 19%-20% of adjusted operating revenues.
Minsk’s liquidity position has a neutral impact on the city’s credit profile. Our assessment of liquidity balances high cash reserves on average with uncertain access to external liquidity and a weak domestic banking system.
We expect that in 2013 the city’s cash and deposit holdings will exceed its debt service, including the redemption of city-guaranteed bank loans of municipal companies and leasing payments of its transport company falling due in the next 12 months. Average cash on accounts and term deposits averaged about Belarusian ruble 2.5 trillion (about $290 million), which fully covers debt service for the next 12 months. Having applied a 30% haircut to deposits the city holds in domestic banks rated in the ‘B’ category, we still assume that the city’s average cash position will comfortably cover its debt service in 2013. We don’t expect Minsk’s debt service, including interest payments and redemption of domestic bonds and guaranteed loans, to exceed a modest 5%-6% of operating revenues until 2015.
We view Minsk’s access to external liquidity as “uncertain”, given the weaknesses of Belarus’ domestic capital market and its banking system, reflected in our Banking Industry Country Risk Assessment (BICRA) score of ‘10’, with ‘1’ being the lowest risk and ‘10’ being the highest risk. (For more details see “BICRA On Belarus Revised To Group ‘10’ From Group ‘9’”, published on Nov. 9, 2011, on RatingsDirect on the Global Credit Portal).
The stable outlook on Minsk reflects that on the Republic of Belarus, because the long-term rating on Minsk is capped by the long-term foreign currency rating on the sovereign.
Because our ICL on Minsk is ‘b+’ and the rating is capped at ‘B-', we don’t currently envisage a realistic scenario under which the ICL would weaken by three levels to fall below the sovereign rating. Consequently, we would be more likely to downgrade the city as a result of a downgrade of the sovereign than as a result of a weakening of the ICL within the outlook horizon.
We could raise the rating on Minsk within the next 12 months, however, if we were to raise the ratings on Belarus and if Minsk maintained its strong budgetary performance and solid cash position, in line with our base-case scenario.
Related Criteria And Research
All articles listed below are available on RatingsDirect on the Global Credit Portal, unless otherwise stated.
-- Methodology For Rating International Local And Regional Governments, Sept. 20, 2010
-- Methodology: Rating A Regional Or Local Government Higher Than Its Sovereign, Sept. 9, 2009