(Repeat for additional subscribers)
June 14 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has upgraded Metropolitan Municipality of Izmir’s Long-Term foreign currency rating and Long-Term local currency rating to ‘BBB-‘ from ‘BB+’. The agency also upgraded Izmir’s National Long-Term Rating to ‘AA+(tur)’ from ‘AA(tur)’. The Outlooks on the Long-Term Ratings are Stable.
The upgrade reflects decreasing debt, strong budgetary performance, robust local economy and improved self-financing capacity on capex. It also reflects high capex needs, foreign currency denominated debt and a loss-making municipal companies and public entities.
The Stable Outlook reflects Izmir’s strong economy which should lead to continued dynamic tax growth and increasing revenue. Despite a projected moderate increase in debt levels, Izmir’s forecast operating performance should enable the municipality to maintain strong fiscal performance and sound debt coverage ratios.
Izmir has a strong budgetary performance with operating margin over 60% in 2012 leading to strong debt coverage ratios. One year’s operating balance was more than enough to repay all direct risk in 2012. Fitch forecasts that strong operating margins will continue to result in safe debt servicing capacity in 2013-2015.
Izmir has consistently demonstrated balanced or closed to balanced budgets. Coupled with growing revenue, this resulted in a decrease in direct risk to 43% of current revenue in 2012 from over 200% in 2006. Fitch expects Izmir’s direct risk to remain at about 50% of current revenue in 2013-2015. Izmir’s external debt represented 36% of direct risk at end-2012 and amounted to EUR108m obtained from the European Investment Bank. It is guaranteed by the National Treasury. However, this debt exposes Izmir to unhedged foreign currency risk.
Turkish metropolitan administrations have high capital expenditure responsibilities, primarily in transport infrastructure. Izmir’s five-year average capex accounted for over 45% of total expenditure. However, Izmir’s self-financing capacity on capex is above its national and international peers. Current balance could cover 112% of capex in 2012 and the figure has not fallen below 75%. Fitch expects these ratios to remain strong in 2013-2015.
Izmir has a compact public sector comprising 10 public companies. However, the overall financial results of the municipal companies and public entities are often negative and require regular budgetary injections from Izmir. Their debt amounted to TRY441m or 27% of operating revenue at end-2012.
Izmir has a well-diversified and dynamic economy with wealth indicators above the national average. It is an important industrial and transportation hub located by the Aegean Sea. Izmir contributed about 8% of GDP, 10% of national tax receipts and accounted for 5% of the national population in 2011.
Continued reduction of direct and indirect debt along with an upgrade of the sovereign would lead to a positive rating action. Conversely, sharp growth of debt leading to deterioration of debt coverage ratios and/or a sharp increase in foreign currency exposure would cause a downgrade.