OREANDA-NEWS. Despite the stable overall economic conditions, the municipalities' financial situation remains strained, according to the current KfW Quick Survey of Municipalities, whereby municipal finance experts were surveyed from mid-November to mid-December 2013 on the municipalities' current and future financial situation and their overall financing situation.

According to the poll, more than half of municipal experts (55%) consider the current overall financing situation to be satisfactory at best. Almost half (48%) of the financial decision-makers in the municipalities are taking a sceptical view of the near future. That means that more municipalities than in the first half of 2013 are anticipating an unfavourable development over the next six months. The differences between the municipalities in good and in difficult financial situations continue to grow, albeit at a somewhat slower pace than before. Municipalities that rate their current overall financing situation as inadequate also largely (65%) anticipate the situation to develop somewhat unfavourably. However, only 5% are expecting the development to be extremely detrimental, compared with 15% one year ago. It would appear that municipalities in a difficult budgetary situation are finally, at least, on a less slippery slope than expected.

According to the municipalities' assessments for 2013 and 2014, they are looking forward to a slight increase in investments. Indeed, there are more experts anticipating high investment activity for the first half of 2014 than those expecting low municipal investments - with a total of seven percentage points. This is a small plus of one percentage point compared with the current assessment of the situation from the second half of 2013. “It is certainly a good sign that municipal experts are now expecting higher investments. But this will not significantly reduce the accrued municipal investment backlog of EUR 128 billion,” says Dr Jorg Zeuner, Chief Economist at KfW.

Casting a glance over the municipal credit market, the demand for cash advances is levelling off following the last two polls. Indeed, during the second half of 2013, only 36% of those surveyed were expecting high demand for cash advances, which, when compared with the previous six months, represents a decline of one third. “Fortunately, fewer are likely to take up cash advances than in the previous year. However, the level of cash advances can only decline in the long term when municipal finances are successfully subjected to structural reform on both the revenue and the expenditure side,” adds Dr Zeuner.

It is good news that the municipal experts are continuing to rate the borrowing conditions as being positive, even though they are somewhat more sceptical than they were during the previous six months. It is interesting that clearly more and more municipalities are apparently considering financing their investments by means of bonds. Currently, around 80% of experts do not consider municipal bonds as being an important financing instrument. However, the outlook over the next five years indicates that this financing instrument could well grow in significance. Indeed, 56% of municipal financial decision-makers expect bonds to become increasingly important as a financing alternative.