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Fitch Affirms Polish Region of Malopolska at 'A-'; Outlook Stable
July 14, 2017 / 8:16 PM / 5 months ago

Fitch Affirms Polish Region of Malopolska at 'A-'; Outlook Stable

(The following statement was released by the rating agency) WARSAW/LONDON, July 14 (Fitch) Fitch Ratings has affirmed the Polish Region of Malopolska's Long-Term Foreign and Local Currency Issuer Default Ratings (IDR) at 'A-'. Fitch has also upgraded the region's National Long-Term Rating to 'AAA(pol)' from 'AA+(pol)'. The Outlooks are Stable. The affirmation reflects Fitch's view that the region's strong operating performance will be maintained over the medium term, providing strong debt service and debt payback ratios. This is despite the projected moderate growth of the region's total debt following the implementation of an ambitious capex programme. The upgrade of the National Long-Term Rating reflects the region's solid management practices and high flexibility on expenditure compared with the majority of Polish local governments rated 'AA+(pol)'. As a result the region is better placed to respond to potential negative developments in its economic environment. KEY RATING DRIVERS The solid management practices of Malopolska are underlined by the continuity in its policies and priorities, and their consistent implementation. This translates into stable and predictable financials for the region. In 2016 the region's operating results outperformed our projections, supported by income tax revenue growth (above 15%) and tight control of operating spending. Malopolska posted a high operating balance of about PLN133 million, accounting for 16.8% of operating revenue and covering the region's annual debt service (interests and repayments) by 3.1x. Fitch base case scenario expects Malopolska's operating results to remain solid in 2017-2020, with an average operating balance of PLN130 million or 13%-14% of operating revenue (excluding one-off items), which is broadly in line with the last five years' results. In 2017 operating performance should be supported by one-off revenue of almost PLN50 million, including an investment-related VAT refund. As a result the region's operating balance may exceed PLN165 million or 18% of operating revenue. Fitch expects the region's budgetary deficit to average 5% of total revenue in 2017-2020 (deficit of 4.4% in 2016) following the roll-out of new investments co-financed from the 2014-2020 EU budget. Fitch projects that Malopolska's investment spending could total PLN2.6 billion in 2017-2020, ie. on average PLN650 million annually (or 45% of annual total expenditure), up from about PLN455 million in 2016. Fitch assumes that the region will continue to receive significant EU funds to co-finance its investments. Consequently, Malopolska's investments will be 90%- covered by capital revenue and the current balance, with the remainder from new debt. Malopolska did not incur any long-term debt in 2016, but financed its investments with bridging loans (PLN107 million at end-2016, to be repaid with EU refunds in 2017). It contracted a short-term PLN27 million loan in 2016 to finance VAT, which it repaid in 1H17. Fitch expects Malopolska's direct debt to remain moderate in 2017-2020, at below 65% of current revenue, although it will grow by about PLN50 million annually to total PLN600 million in 2020 (PLN385 million in 2016 or 48.5% of current revenue). This, together with bridging loans for funding EU co-financed investments, is likely to result in total debt increasing to PLN700 million in 2020 or a still moderate 75% of current revenue (PLN520 million or 65% in 2016). At end-2016 about 75% of the debt was made up of long-term loans from the Council of Europe Development Bank (CEB) and from the European Investment Bank, both on favourable terms. However, these loans expose the region to foreign exchange risk. As with other local governments in Poland, Malopolska is not allowed to hedge foreign exchange risk. However, this is mitigated by the region budgeting higher amounts for debt service than necessary. Fitch expects the region's debt service ratios to remain strong. Debt service, projected to average PLN60 million annually (principal and interests), is likely to be covered by the operating balance by more than 2x. The debt-to-current balance ratio is expected to weaken to around five years in 2019-2020 from about three years in 2014-2016, but should remain healthy at well below the region's final debt maturity (up to 10 years). Malopolska benefits from high spending flexibility, as reflected in the moderate share of fixed operating costs in the regional budget (staff costs accounted for about 31% of total operating expenditure in 2016). This balances the region's limited revenue-raising flexibility, as income tax rates are decided by the state (tax revenue accounted for about 60% of operating revenue in 2016). The region's economy is well-diversified. Malopolska contributed 7.8% (PLN133,974 million) to national GDP in 2014, making it the fifth-largest contributor among 16 Polish regions. However, due to its large population of 3.37 million, GDP per capita is about 10.9% below the national average. The regulatory regime for Polish local governments (LGs) is stable. Their activities and financial statements are closely monitored and reviewed by the central administration. Disclosure of LGs' accounts is satisfactory. Main revenue is centrally distributed based on a legally defined formula, which limits the central government's scope for discretion. RATING SENSITIVITIES Malopolska's IDRs are currently constrained by the sovereign (A-/Stable) ratings and any change in the sovereign IDRs will be mirrored in the region's IDRs. The ratings may be downgraded if Malopolska's operating performance weakens and direct risk increases above 80% of current revenue on a sustained basis. Contact: Primary Analyst Renata Dobrzynska Director +48 22 338 62 82 Fitch Polska S.A. 16 Krolewska Street Warsaw 00-103 Secondary Analyst Dorota Dziedzic Director +48 22 338 62 96 Committee Chairperson Guilhem Costes Senior Director +34 93 323 8410 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email:; Malgorzata Socharska, Warsaw, Tel: +48 22 338 62 81, Email: Additional information is available on Applicable Criteria International Local and Regional Governments Rating Criteria - Outside the United States (pub. 18 Apr 2016) here National Scale Ratings Criteria (pub. 07 Mar 2017) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here#solicitation Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. 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