Fitch affirms Armenian capital at 'B+'; outlook positive
29.05.2019,
12:35
Fitch Ratings has affirmed the Armenian City of Yerevan's Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) at 'B+' with Positive Outlooks and Short-Term Foreign-Currency IDR at 'B'.
YEREVAN, May 29, /ARKA/ Fitch Ratings has affirmed the Armenian City of Yerevan's Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) at 'B+' with Positive Outlooks and Short-Term Foreign-Currency IDR at 'B'.
It said Yerevan's IDRs are constrained by Armenia's sovereign IDRs (B+/Positive) as the city's standalone credit profile (SCP) is assessed at 'bb+'. The city's SCP reflects a combination of a 'Vulnerable' risk profile assessment and strong debt metrics leading to a 'aaa' debt sustainability assessment.
Yerevan is Armenia's capital and its largest metropolitan area. It is the country's largest market with a developed services sector and most populous community, with 1.1 million people. Yerevan's wealth metrics remain relatively modest in the international context affecting the city's overall financial profile. Yerevan remains debt free, although it can borrow on the domestic debt capital market, subject to certain restrictions. The city's accounts are cash-based, while budget framework covers single year.
The city's tax base is moderate in size and has limited prospects to grow, in Fitch's view, due to the relatively weak local economy. In 2018 Armenia's GDP increased by 5% yoy and Fitch expects economic growth at about 4% yoy in 2019-2020. However, due to institutional arrangement taxes represent minor portion of the city's revenue sources, 15% of total revenue in 2018.
Yerevan's budget revenue is mainly composed of central government transfers (2018: 66% of total revenue), followed by non-tax revenue (13%) and asset sales (6%). The intergovernmental transfers enhance the city's fiscal capacity to a level sufficient to cover expenditure, which is evident from the track record of balanced budgets in 2014-2018. Nonetheless, as the transfers stem from a 'b' rated counterparty we assess the city's overall revenue robustness as weak.
Yerevan's ability to generate additional revenue in response to possible economic downturns is very limited, therefore we assess the city's revenue adjustability as weak. The central government holds overwhelming fiscal authority, which significantly limits the city's fiscal autonomy. The city's autonomy to set rates or introduce new taxes is limited by the country's legal framework. Yerevan collects taxes on property and vehicles, which taken together represented 15% of the city's total revenue. The city also collects various fees, fines and payments (non-tax revenue), which accounted for 13% of its total revenue 2018.
The city exerts prudent control of its expenditure. This is evident from the track record of a spending decrease greater than that of declining revenue in 2016-2018 (4.6% and 3.9% respectively). We expect these practices to be continued in the medium term. Yerevan is vested with responsibilities in education, healthcare, some types of social benefits, general public administration, environmental protection, culture and recreation, and housing, utilities and construction. Education and healthcare spending, which is of counter- or non-cyclical nature, accounted for 32% of the city's expenditure in 2018. Yerevan is not required to adopt anti-cyclical measures, which would inflate expenditure related to social benefits in a period of downturn. At the same time, the city's budgetary policy is dependent on the decisions of the central government, which could negatively affect the dynamic of expenditure.
Fitch assesses Yerevan's expenditure adjustability as low. Most spending responsibilities are mandatory for the city, with inflexible items dominating expenditure structure. Therefore the bulk of expenditure could be difficult to cut in response to potential revenue shrinking. Although the city retains certain flexibility to cut or postpone capex in case of stress, capital outlays were already reduced to an average of 7.7% of total spending in 2015-2018 from the higher level of 24.7% in 2014, following a prolonged economic slow-down in Armenia. The city's ability to materially cut expenditure is also limited by relatively low per capita expenditure (2018: USD130) compared with international peers.
According to national budgetary regulation Armenian LRGs are subject to strict debt limitations. Therefore the city has been free of any debt or guarantees since forming a community in 2008. Statutory provisions of the national legal framework guiding debt or guarantees issuance restrict the city from incurring significant debts and new borrowing restrictions as well as limits on annual interest payments.
Yerevan's liquidity position improved in 2018 to AMD7.8 billion from AMD1.9 billion in 2017, as the city posted surplus budget with excess cash being retained in reserves. Yerevan holds its cash in treasury accounts as deposits with commercial banks are prohibited under the national legal framework for LRGs. For extra liquidity the city could borrow from the national treasury. As the liquidity profile remains exposed to volatility, while counterparty risk associated with the liquidity providers is 'B+', which limits the assessment of this risk factor at Weaker.
According to our rating case Yerevan's debt payback ratio (net direct risk-to-operating balance) - the primary metric of debt sustainability assessment - will remain strong over the next five years due to a sufficient cash and expected very low debt, stemming from the city's public sector. Secondary metric - fiscal debt burden measured as net adjusted debt-to-operating revenue and actual debt-servicing coverage ratio (ADCSR) - are assessed at 'aaa'. This leads to the city's overall debt sustainability assessment at 'aaa'.
Fitch's rating case expects close to balanced budgets in 2019-2023 with occasional minor deficits to be funded by cash reserves and minimal new debt (2022-2023). However, as the city will virtually remain free of debt, we expect a strong payback ratio and fiscal debt burden metrics in 2019-2023.
Fitch classifies Yerevan as a type B LRG, which has to cover debt service from cash flow on an annual basis. The city's SCP is assessed at 'bb+', which reflects a combination of 'Vulnetrable' risk profile and strong debt metrics leading to a 'aaa' debt sustainability assessment. Yerevan's notch-specific SCP also factors in peer comparison, while the IDR is not affected by asymmetric risk or extraordinary support from the central government. -0-
It said Yerevan's IDRs are constrained by Armenia's sovereign IDRs (B+/Positive) as the city's standalone credit profile (SCP) is assessed at 'bb+'. The city's SCP reflects a combination of a 'Vulnerable' risk profile assessment and strong debt metrics leading to a 'aaa' debt sustainability assessment.
Yerevan is Armenia's capital and its largest metropolitan area. It is the country's largest market with a developed services sector and most populous community, with 1.1 million people. Yerevan's wealth metrics remain relatively modest in the international context affecting the city's overall financial profile. Yerevan remains debt free, although it can borrow on the domestic debt capital market, subject to certain restrictions. The city's accounts are cash-based, while budget framework covers single year.
The city's tax base is moderate in size and has limited prospects to grow, in Fitch's view, due to the relatively weak local economy. In 2018 Armenia's GDP increased by 5% yoy and Fitch expects economic growth at about 4% yoy in 2019-2020. However, due to institutional arrangement taxes represent minor portion of the city's revenue sources, 15% of total revenue in 2018.
Yerevan's budget revenue is mainly composed of central government transfers (2018: 66% of total revenue), followed by non-tax revenue (13%) and asset sales (6%). The intergovernmental transfers enhance the city's fiscal capacity to a level sufficient to cover expenditure, which is evident from the track record of balanced budgets in 2014-2018. Nonetheless, as the transfers stem from a 'b' rated counterparty we assess the city's overall revenue robustness as weak.
Yerevan's ability to generate additional revenue in response to possible economic downturns is very limited, therefore we assess the city's revenue adjustability as weak. The central government holds overwhelming fiscal authority, which significantly limits the city's fiscal autonomy. The city's autonomy to set rates or introduce new taxes is limited by the country's legal framework. Yerevan collects taxes on property and vehicles, which taken together represented 15% of the city's total revenue. The city also collects various fees, fines and payments (non-tax revenue), which accounted for 13% of its total revenue 2018.
The city exerts prudent control of its expenditure. This is evident from the track record of a spending decrease greater than that of declining revenue in 2016-2018 (4.6% and 3.9% respectively). We expect these practices to be continued in the medium term. Yerevan is vested with responsibilities in education, healthcare, some types of social benefits, general public administration, environmental protection, culture and recreation, and housing, utilities and construction. Education and healthcare spending, which is of counter- or non-cyclical nature, accounted for 32% of the city's expenditure in 2018. Yerevan is not required to adopt anti-cyclical measures, which would inflate expenditure related to social benefits in a period of downturn. At the same time, the city's budgetary policy is dependent on the decisions of the central government, which could negatively affect the dynamic of expenditure.
Fitch assesses Yerevan's expenditure adjustability as low. Most spending responsibilities are mandatory for the city, with inflexible items dominating expenditure structure. Therefore the bulk of expenditure could be difficult to cut in response to potential revenue shrinking. Although the city retains certain flexibility to cut or postpone capex in case of stress, capital outlays were already reduced to an average of 7.7% of total spending in 2015-2018 from the higher level of 24.7% in 2014, following a prolonged economic slow-down in Armenia. The city's ability to materially cut expenditure is also limited by relatively low per capita expenditure (2018: USD130) compared with international peers.
According to national budgetary regulation Armenian LRGs are subject to strict debt limitations. Therefore the city has been free of any debt or guarantees since forming a community in 2008. Statutory provisions of the national legal framework guiding debt or guarantees issuance restrict the city from incurring significant debts and new borrowing restrictions as well as limits on annual interest payments.
Yerevan's liquidity position improved in 2018 to AMD7.8 billion from AMD1.9 billion in 2017, as the city posted surplus budget with excess cash being retained in reserves. Yerevan holds its cash in treasury accounts as deposits with commercial banks are prohibited under the national legal framework for LRGs. For extra liquidity the city could borrow from the national treasury. As the liquidity profile remains exposed to volatility, while counterparty risk associated with the liquidity providers is 'B+', which limits the assessment of this risk factor at Weaker.
According to our rating case Yerevan's debt payback ratio (net direct risk-to-operating balance) - the primary metric of debt sustainability assessment - will remain strong over the next five years due to a sufficient cash and expected very low debt, stemming from the city's public sector. Secondary metric - fiscal debt burden measured as net adjusted debt-to-operating revenue and actual debt-servicing coverage ratio (ADCSR) - are assessed at 'aaa'. This leads to the city's overall debt sustainability assessment at 'aaa'.
Fitch's rating case expects close to balanced budgets in 2019-2023 with occasional minor deficits to be funded by cash reserves and minimal new debt (2022-2023). However, as the city will virtually remain free of debt, we expect a strong payback ratio and fiscal debt burden metrics in 2019-2023.
Fitch classifies Yerevan as a type B LRG, which has to cover debt service from cash flow on an annual basis. The city's SCP is assessed at 'bb+', which reflects a combination of 'Vulnetrable' risk profile and strong debt metrics leading to a 'aaa' debt sustainability assessment. Yerevan's notch-specific SCP also factors in peer comparison, while the IDR is not affected by asymmetric risk or extraordinary support from the central government. -0-
