Fitch Affirms Polish Region of Malopolska at 'A-'; Outlook Stable
The affirmation is based on Fitch's unchanged baseline scenario regarding the region's sound operating performance and moderate debt level in 2016-2019 with healthy debt service ratios.
KEY RATING DRIVERS
The IDRs reflect the region's solid strategic and financial management, sound operating performance, high self-financing capacity of investments and flexible operating expenditure.
Fitch forecasts Malopolska's operating results will remain solid in 2016-2019, with an average operating balance of above PLN100m, accounting for 11%-13% of operating revenue, which is in line with the preliminary results for 2015 (about PLN90m and 11%). This will be supported by growth in income tax revenue, following the projected growth of the national economy. It will also come from Malopolska's declared willingness to keep operating expenditure growth well under control and to accumulate its own resources, which from 2016 could be aimed at investments.
Fitch projects that Malopolska's investment spending in 2016-2019 could total PLN2.9bn (on average 45% of annual total expenditure), as the region has started to roll out investments under the 2014-2020 EU budget. Fitch assumes that the region will continue to receive high EU funds to co-finance its investments. Consequently, over 90% of investment financing will come from the region's current balance and capital revenue. The remainder will be covered by new debt.
Fitch expects Malopolska's direct debt to grow by about PLN50m annually in 2016-2019 reaching about PLN630m but remaining still below 70% of current revenue (PLN430m and 54% expected at end-2015). Despite the increase, Fitch projects that the city's debt service ratios will remain strong. Debt service, projected to average PLN60m annually, is likely to be covered about 2x by the operating balance. The debt-to-current balance ratio is expected to slightly weaken to around 7 years (5 years expected in 2015), which will be still well below the region's final debt maturity (up to 10 years).
Like other Polish regions, Malopolska is characterised by relatively high flexibility on its operating spending, reflected in the moderate proportion of fixed operating costs in the regional budget (staff costs averaged 28% of total opex in 2013-2015). This counteracts the region's limited revenue-raising flexibility, as income tax rates are decided by the state (revenue from this source averaged 47% of operating revenue in 2013-2015).
The region's economy is well diversified and services-orientated, with 66.73% of service sector in GVA (above the national average of 63.4%). Malopolska contributed 7.7% to national GDP in 2013, which placed it fifth in the 16 Polish regions. However, due to its high population (3.36 million), its GDP per capita was about 11.3% below national average. The region's unemployment rate of 8.2% at end-November 2015 was below the national average (9.6%).
Malopolska performs its tasks within a predictable regulatory regime. The region is transparent in its operations, supported by the publication of long-term financial projections and regular disclosure of annual accounts.
RATING SENSITIVITIES
An upgrade of the sovereign rating, accompanied by the region's solid operating performance, coupled with declining pressure on debt-funded capex and low indirect risk, could trigger an upgrade.
The ratings could be downgraded if Malopolska's operating performance consistently weakens and direct and indirect debt growth above 80% of current revenue for two consecutive years.
KEY ASSUMPTIONS
Fitch expects that the region will continue its financial and strategic policy, which supports its good operating results in the medium term.
Fitch also assumes that the region's track record of strong adherence to all EU regulations and procedures will allow it to implement investments projects largely co-financed by the EU. Otherwise, the region could face the penalty of having to return previously received EU grants.
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