October 11, 2017 / 12:51 PM / 2 months ago

Fitch: Spending by Polish Cities Offset by Solid Management

(The following statement was released by the rating agency) Link to Fitch Ratings' Report: Prospects for Polish Cities here WARSAW/LONDON, October 11 (Fitch) Fitch Ratings says that solid management practices underpin sound operating results of Polish cities despite rising spending pressure. Fitch expects the cities' sound operating performance to continue in the medium term, resulting from strong financial management, cost rationalisation and efficiencies that are aimed at reducing potential risks and offsetting operating spending pressures. State-initiated education reforms, including the termination of junior high-schools and growing demand for kindergarten care, have added to these pressures. Education dominates opex, which is structurally inflexible, with rigid cost structures, while many cost drivers are outside the cities' direct control. Polish cities also face increasing opex pressure from rising salaries and maintenance costs from completed investments. Fitch believes the cities' authorities will target cost savings and efficiencies to offset spending pressure, focusing on employment; modernising public buildings; further IT system development to streamline and consolidate the provision of municipal services; and the creation of common service centres. The cities have to comply with individually calculated debt ceilings, so spending controls are key, because of higher financing requirements following the roll-out of EU co-financed investments. Fitch forecasts the cities' operating balance in 2017-2019 will account for 9%-10% of operating revenue and will be 1.5x higher than annual debt service (interests and repayments). In 2018, the results could be slightly weaker than indicated because of local elections scheduled for November of that year, so spending cuts or increases to taxes or fees are less likely. However, Poland's expanding economy, which Fitch estimates will grow about 4% in 2017 and 3.2% annually in 2018-2019, will support growing tax revenue. We expect the cities to post only a small aggregate budget deficit in 2017, equivalent to 0.3% of total aggregate revenue following the weaker-than-budgeted realisation of capex. We forecast capex to amount to PLN10.0 billion in 2017, or 65% of the initial amount. From 2018, we see the deficit before debt variation widening, reaching almost 5% in 2019 following the roll-out of investments, with capex rising to about PLN15.0 billion, about 18% of total annual spending. Fitch believes that in 2017, cities could exploit their large cash balances to finance capex rather than drawing new debt. Fitch expects the level of direct debt will grow by about PLN3.0 billion a year from 2018 and may total almost PLN40.0 billion in 2019 (2016: PLN32.9 billion or 47% of revenue). In relative terms, debt will remain moderate and will not exceed 50% of current revenue. Fitch forecasts that the cities' debt-service ratios should remain healthy in 2017-2019, with an operating balance covering the debt service (interests plus instalments) on average of 1.5x, buoyed by strong operating results and despite the projected increase in debt service. More details are in "Prospects for Polish Cities" available at www.fitchratings.com or by clicking on the link above. Contact: Renata Dobrzynska Director +48 22 338 62 82 Fitch Polska S.A. 16 Krolewska Street Warsaw 00-103 Magdalena Mikolajczak Analyst +48 22 338 62 85 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. Additional information is available on www.fitchratings.com ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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