Fitch Affirms Romanian City of Bucharest at 'BBB-'; Outlook Stable

Fitch Ratings has affirmed the Romanian City of Bucharest's Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) at 'BBB-' with Stable Outlooks. A full list of rating actions is below.   The affirmation reflects Fitch's unchanged view that the city's operating performance and debt ratios will remain in line with peers with 'aa' category debt sustainability in the medium term. This is despite pressures on its budget from still-high inflation and the implementation of an ambitious investment plan.   Fitch assesses the city's Standalone Credit Profile (SCP) at 'a', reflecting a combination of a 'Midrange' risk profile and 'aa' financial profile. The city's IDRs are constrained by the sovereign (Romania; BBB-/Stable) and capped at 'BBB-'.   KEY RATING DRIVERS   Risk Profile: 'Midrange' Fitch sees a moderately low risk relative to international peers that Bucharest's ability to cover debt service with its operating balance may weaken unexpectedly over 2024-2028, due to lower-than-expected revenue, higher-than-anticipated expenditure, or an unexpected rise in liabilities or debt or debt-service requirement.   Revenue Robustness: 'Midrange' The city has stable revenue, growing in line with national GDP. Taxes and fees accounted for almost all of Bucharest's operating revenue in 2023, driven by moderately cyclical economic activities. Personal income tax (PIT) was a high 92% of operating revenue, while other taxes, fees and fines represented only 3%. Transfers are less important (only 4.3%) for Bucharest than other Romanian cities, and include the city's share of VAT, which is a more volatile item.   Revenue Adjustability: 'Weaker' The central government sets income tax rates and the majority of current transfers. Bucharest has little flexibility on local taxes, charges and fees, given their low share of operating revenue. We consequently assume the city's available leeway would cover less than 50% of a decline in revenue in an economic downturn.   Expenditure Sustainability: 'Midrange' Bucharest's control on opex growth is moderate and its 'Midrange' expenditure sustainability is in line with other Fitch-rated Romanian municipalities. The city's main responsibilities are non-cyclical, including social welfare assistance, public transport and public services. Bucharest's total expenditure growth (adjusted for inflation) has generally been in line with real GDP growth. The city tends to proceed with investments only when non-reimbursable funding from the EU and state budgets is assured.   Expenditure Adjustability: 'Stronger' We believe Bucharest has much more flexibility than other rated municipalities in Romania to cut spending in response to shrinking revenue. Our assessment is supported by balanced-budget rules, under which local governments' budgets are monitored by the central government and are not allowed to run deficits.   Mandatory responsibilities, which include education, social care, and public safety, are less than 70% of opex. Unlike other cities in Romania, salaries and wages account for less than 8% and acquisition of goods and services 7%. The largest part of opex is transfers to municipal companies and public entities in the city (2023: 81% of opex), which are reasonably flexible. The city can also reduce a significant part of its capex, given its high share of total expenditure. Capex is volatile, ranging between 8% and over 20% of total expenditure (2023: 17.5%) in 2019-2023.   Liabilities & Liquidity Robustness: 'Midrange' Fitch continues to view the national framework as supportive of liabilities robustness. Local governments (LGs) in Romania must comply with a debt servicing limit at 30% of the past three-year average of their own revenue. There are further restrictions on risky loan types and derivatives.   Bucharest faces refinancing risk in its RON2,220 million bullet repayment (54% of its direct debt at end-2023). However, the city has successfully accessed capital markets to refinance past maturing bullet debt. Foreign-exchange (FX) risk was less than 10% of debt at end-2023 and is mitigated by a managed floating-rate regime, limiting currency fluctuations against the euro. Bucharest reduced its interest-rate risk in 2023 with 32% of its debt at floating rates, down from 42% at end-2022.   Liabilities & Liquidity Flexibility: 'Midrange' Fitch views emergency liquidity support from the central government as sufficient. Bucharest has a record of sound available liquidity (2023: RON214 million) and maintained its liquidity coverage (operating balance plus unrestricted cash/debt service) at 2.3x on average in 2019-2023, although it also has access to the state treasury. Our rating case projects the city will maintain its liquidity coverage at 3x on average in 2024-2028.   Financial Profile: 'aa category' Fitch assesses Bucharest's financial profile in the middle of the 'aa' category. Our rating case expects the payback ratio to weaken to just above 7x by 2028, from 3.1x in 2023. We expect the coverage ratio (synthetic calculation) to weaken to an average of just 1.4x from 3.1x in 2023. We project the fiscal debt burden will further decrease to 55% (2023: 58%).   In 1H24, Bucharest reported sound operating results, with an operating balance of RON550.4 million (2023: RON1,254 million), which was about 19% of operating revenue. This was driven by the authorities' continued effective measures to limit opex growth. Good operating results and slower capex resulted in an intra-year budget surplus of RON315.3 million. Fitch expects a moderate acceleration of capex, particularly in 4Q24, although some of the scheduled 2024 capex may still slip into 2025.   Fitch's rating case expects the city's operating balance to decline to below RON787 million on average in 2024-2028, due to inflationary pressures, and the increasing maintenance costs of newly-built infrastructure. We assume that the city's debt will increase modestly to RON4.3 billion in 2028 (2023: RON4.1 billion) following investments. However, Bucharest's debt sustainability metrics overall remain in line with its SCP.   DERIVATION SUMMARY Bucharest's 'a' SCP reflects its 'Midrange' risk profile and mid-'aa' category debt sustainability assessment. The latter is derived from a debt payback and debt levels at 'aa' and weaker debt servicing coverage at 'bbb'. The SCP also factors in the city's favourable comparison with national and international peers in the same rating category. The city's IDRs are not affected by any other rating factors but are constrained by the sovereign's IDRs.   Short-Term Ratings The city's Short-Term IDR is in line with Fitch's correspondence table and capped at the sovereign's 'F3' Short-Term IDR. (Source:https://www.fitchratings.com/)