Tuesday, January 9 2018 13:56
Karine Melikyan

Fitch improved outlook on Yerevan`s rating from "Stable" to "Positive"

Fitch improved outlook on Yerevan`s rating from "Stable" to  "Positive"

ArmInfo. Fitch Ratings has  improved the outlook on the rating of the city of Yerevan from  "Stable" to "Positive", once again confirming the long-term issuer  default ratings ("IDR") in foreign and local currency at <B +> and  the Short-term IDR in foreign currency <B>. Rating drivers of  long-term IDRs and short-term foreign currency IDRs are not affected,  which is the reason for their confirmation. As reported on the Fitch  Ratings website, improvement of the forecast and confirmation of the  credit rating of Yerevan is dated December 22, 2017. For the first  time, Fitch Ratings assigned Yerevan a rating on December 2, 2016.

The Fitch report notes that following the results of 9 months of  2017, Yerevan's budgetary indicators were at an acceptable level: the  budget surplus before the debt movement was at the level of 4% of all  revenues (2016: the budget surplus was 1.5%). This was due to  expenditures made at 53% of the annual budget expenditures, while the  collected revenues accounted for 56% of the annual figures put into  the budget. The agency notes that Yerevan's expenses are likely to  accelerate in the fourth quarter of 2017, which will bring the budget  figures closer to the previously forecasted small deficit. As of the  end of September 2017.  Yerevan did not have any debt or guarantees.   The city retains a debt-free status since the formation of the  municipality in 2008. The provisions of the national legal system  that determine the issuance of debt or the provision of guarantees  limit the attraction of significant borrowings by the city. As of  October 1, 2017 the liquidity position of the city was good with cash  in the amount of 2.5 billion AMD (2016: 1.4 billion AMD). The city  holds cash on treasury accounts, as placing funds on deposits in  commercial banks is legally prohibited.

KEY RATING DRIVERS Yerevan's ratings are constrained by those of  Armenia (December 15, 2017 confirmation at the level of "B +" / with  a revision of the forecast from "Stable" to "Positive") (B+/Stable),  in particular the country's institutional framework for local and  regional governments, which Fitch assesses as weak. The ratings also  factor in the city's capital status, satisfactory budgetary  performance, supported by steady transfers from the central  government, and zero debt.

Fitch expects the city to continue posting satisfactory fiscal  performance with a lower single-digit operating margin in 2017-2019  (2016: 1.6%). The city's operating margin decrease is due to negative  shocks resulting from the protracted slowdown of Armenia's economy in  2014-2015. We project a likely margin consolidation at this level. We  also expect Yerevan to run close to balanced budget in 2017-2019 in  line with historical result (2012-2016: average deficit 0.15%).   Fitch rating notes that  Yerevan's interim fiscal performance was  satisfactory, with a surplus before debt variation of 4% of total  revenue at end 9M17 (2016: surplus 1.5%). This was driven by spending  53% of annually appropriated expenditure, while collected revenue was  56% of the annual budgeted figures. Fitch notes that the city's  expenditure is likely to accelerate in 4Q17, bringing fiscal  performance closer to the previously projected minor deficit. 

According to our base case scenario, the city will continue receiving  financial support from the central government in line with its  historical track record, as current transfers averaged 74% of the  city's operating revenue in 2012-2016.

The city's interim capex by end-3Q17 was in line with 2015-2016, at  7% of total expenditure (2016: 7%). We projected lower capex than the  track record of recent years (2012-2014: average 24%), reflecting the  completion of sizeable infrastructure investments in 2012-2014. Most  capex is funded by central government transfers and donor grants.   Fitch expects the city to continue low capex trend (about 7%-9% of  total spending), to be funded by asset sales and capital transfers  from the central government.

As of end-September 2017 the city was free from any debt or  guarantees. Yerevan has maintained debt-free status since forming a  community in 2008. Statutory provisions of the national legal  framework guiding debt or guarantees issuance restrict the city from  incurring significant debt. The city's interim liquidity position was  healthy, with cash of AMD2.5 billion as of 1 October 2017 (2016:   AMD1.4 billion). The city holds its cash in treasury accounts as  deposits with commercial banks are prohibited under the legal  framework. 

Yerevan is likely to benefit from economic recovery in Armenia. In  its macro forecast Fitch expects full-year growth of the national  economy at about 4.3% to the previous year, with acceleration to 3.6%  in 2018-2019 due to favorable conditions for increasing remittances  and export growth.

As the country's capital and most populated city, Yerevan is  Armenia's largest market with a developed services sector.  At the  same time, Yerevan's welfare indicators remain relatively low in the  international context, due to the moderate GDP per capita in Armenia,  "the Fitch report says.  RATING SENSITIVITIES Changes to the  sovereign ratings will be mirrored on the city's ratings, as Yerevan  is capped by the ratings of Armenia.  In the absence of sovereign  downgrade a significant deterioration of fiscal performance or  material growth in direct risk, would lead to a downgrade. 

Note that on December 1, 2017 the Yerevan Municipality and the  European Investment Bank signed an agreement on the provision of 7  million euros to increase energy efficiency in Yerevan. According to  Mayor Taron Margaryan, the signed agreement with the EIB is  unprecedented in its kind, since for the first time the community of  Yerevan signs a non-sovereign loan agreement. Thus, Yerevan became  the first community to receive a loan from an international  organization without state guarantees. "This, of course, is the best  proof of the confidence of the international organization provided to  Yerevan," he said.

According to the assumption of AmRating analysts, the assignment of  the rating to the Armenian capital is probably conditioned by the  likely plans of the Yerevan mayor's office to enter the loan  obligations market, which has not been reported yet. 

Yerevan became the first community to receive a loan from an  international organization without a state guarantee - this is the  best proof of the confidence rendered to Yerevan.


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