OREANDA-NEWS. September 28, 2015. Fitch Ratings has affirmed the Polish City of Gdansk's Long-term foreign and local currency Issuer Default Ratings (IDR) at 'A-' and National Long-term rating at 'AA(pol)'. The Outlooks are Stable.

The affirmation reflects Fitch's unchanged baseline scenario regarding the city's sound operating performance and level of debt.

KEY RATING DRIVERS
The 'A-' IDR reflects the city's debt stabilisation and solid strategic and financial management, which coupled with a strong operating performance supports healthy debt service and debt payback ratios.

Fitch's base case scenario expects Gdansk's operating margin to be 13%-14% in the medium term, which will be in line with the 2011-2014 average. This will be driven by the city's financial flexibility, the city authorities' policy of limiting operating expenditure growth, coupled with growth of tax revenue, supported by projected growth of the national economy.

Fitch also expects direct risk for 2015-2017 to further decline and stabilise at a moderate 50% of current revenue (end-2014: PLN1.2bn, or 54%). In the same period, debt servicing (excluding premature repayments) will be around 35% of the operating balance and the debt-to-current balance. This will slightly deteriorate to 4.0 years from 3.4 years in 2014, but remain well below the city's final debt maturity (up to 17 years).

At end-2014 most of the city's direct debt (79%) had floating rates, which exposes Gdansk to interest rate risk. Local and regional governments in Poland cannot use any derivatives to hedge their interest rate or FX risk exposure. However, Gdansk's high cash reserves and a prudent budgetary approach, under which the city usually budgets and secures higher amounts for interest payments on debt than the actual amounts paid offsets this risk.

Fitch projects that Gdansk's investment spending in 2015-2017 could total PLN1.5bn (about 20% of annual total expenditure on average), which will be much lower than the 2012-2014 average (PLN2.7bn or 32%). Fitch expects phasing out of investments from the EU budget programme that has now ended may overlap in 2015 with the preparation to rollout new investments for the 2014-2020 EU budget. Over 80% of investment financing may come from the city's current balance and capital revenue, limiting the city's recourse to debt.

The city's authorities follow a prudent budgetary and financial policy, which guarantees a solid operating performance despite persistently high pressure on operating expenditure. Much of this pressure arises from under-funded responsibilities that were transferred to local governments by the state in the past and from the dominance of rigid spending items, such as education and social care. Additionally, pressure on the budget comes from growing maintenance costs as investments are completed.

RATING SENSITIVITIES
The ratings could be upgraded if the city sustainably maintains its operating margin above 15%, accompanied by direct risk below 50% of current revenue

Negative rating action could result from a sustained deterioration of the operating margin to well below 10% or a significant rise in Gdansk's direct debt, leading to the city's debt payback ratio (debt/current balance) exceeding 10 years.

KEY ASSUMPTIONS
Fitch expects the city to continue its efficient operating expenditure growth control and to manage the budget prudently in the medium term.

Fitch assumes that the city will continue to receive EU funds to co-finance its investment programme.

Fitch also assumes that the city will continue to comply with all the EU regulations and procedures when implementing investments projects co-financed by the EU. Otherwise, Gdansk could face the penalty of having to return previously received EU grants.