OREANDA-NEWS. Fitch Ratings has revised the Polish City of Opole's Outlook to Positive from Stable and affirmed its National Long-term rating at 'BBB+(pol)'.

The Outlook change reflects Fitch's view that the city will maintain sound operating performance in 2015, in line with 2013-2014 levels, and that debt ratios remain healthy, supported by sound management practices and a growing national economy.

KEY RATING DRIVERS
The National rating of 'BBB+(pol)' reflects the city's stable operating performance, sound debt ratios, but also its modest economy and budget, which render it vulnerable to adverse changes in the national economy. Over the medium-term Fitch forecasts an operating margin above 6% and operating balance around PLN40m on average. This will be sufficient to cover the city's debt-service obligations by 1.5x on average and support a debt-to-current balance of seven to eight years.

We based our scenario on the assumption that the city's new administration will continue to rationalise and control current spending and to exercise a prudent financial policy. These together contributed to an improved operating margin above 6% in 2013-2014, compared with 4% in 2012. We also assume that national economic growth would support the local economy's development and positively impact the city's tax revenue.

Fitch forecasts that Opole's direct debt for 2015-2017 will remain at a healthy 45% of current revenue despite expected growth in nominal terms as a result of investments. We project direct debt of PLN230m or a moderate 39% of current revenue at end-2015 (2014: PLN224m or 39%). Opole's debt policy is focused on incurring debt only to finance investments and minimising the cost of funds so that the operating balance is sufficient to cover debt service.

We expect the city's capex at around PLN100m annually over the medium term, representing on average 14% of total expenditure. We also assume that the majority will be financed by capital revenue (including EU funding) and the current balance, limiting the city's debt financing needs. The city's goal is to exploit funds available for Polish local governments under the 2014-2020 EU budget, from which they may apply to up to 85% of co-financing. The city's investments are focused on improving local infrastructure including local roads, and the transportation system within the city, and new bus fleets.

Opole's small budget renders it more exposed to negative economic trends in comparison to its peers. Opole's economy is well-diversified, but industry and construction remain a major contributor to the city's GVA. In 2012 (latest available data) both sectors generated 39% of GVA (data for Opole sub-region where the city is located), above the national average of 34%. The city's services sector is well-developed although at 58% its share in GVA is below the national average of 64%. The unemployment rate at end-August 2015 (5.5%) was well below the national average of 10%.

Fitch expects Poland's real GDP will grow 3.5% annually in 2015-2017. National economic growth should continue to support the city's economic development. In addition, the local economy will benefit from an improving local infrastructure, which should stimulate business activity and provide the city with a stronger tax base and hence higher tax revenue.

RATING SENSITIVITIES
An upgrade may result from a sustained sound operating performance with operating margin above 6% and moderate debt levels at below 50% of current revenue.

KEY ASSUMPTIONS
Fitch assumes that operating expenditure does not grow faster than operating revenue, leading to a deterioration of the operating margin.

Fitch assumes the investment programme will not be significantly extended leading to an increase in the city's demand for new debt.

Fitch also assumes that the city will comply with all the EU regulations and procedures when implementing investments projects co-financed by the EU.