ArmInfo.Fitch Ratings has upgraded the City of Yerevan's Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) to 'BB- ' from 'B+'. The Outlook is Stable. The upgrade follows that of Armenia (see 'Fitch Upgrades Armenia to 'BB-'; Outlook Stable' dated 22 November 2019 on www.fitchratings.com) as we view the city's ratings as constrained by the sovereign.
Under EU credit rating agency (CRA) regulation, the publication of International Public Finance reviews is subject to restrictions and must take place according to a published schedule, except where it is necessary for CRAs to deviate from this in order to comply with their legal obligations. In this case the deviation was caused by the upgrade of Armenia, the press release of Fitch reads.
Fitch interprets this provision as allowing us to publish a rating review in situations where there is a material change in the creditworthiness of the issuer that we believe makes it inappropriate for us to wait until the next scheduled review date to update the rating or Outlook/Watch status. The next scheduled review dates for the City of Yerevan to be held in 2020 will be determined by end-2019 once the calendar comprising the next reviews is published.
KEY RATING DRIVERS Fitch has re-assessed Yerevan's risk profile as 'Weaker' from 'Vulnerable', following the sovereign upgrade of Armenia and reflecting four Weaker and two Midrange attributes on the six key risk factors, unchanged since last review.
Revenue Robustness: Weaker Yerevan's budget revenue is mainly composed of central government transfers (2018: 66% of total revenue), followed by taxes (15%), non-tax revenue (13%) and asset sales (6%). Intergovernmental transfers enhance the city's fiscal capacity to a level sufficient to cover expenditure, which is evident from the track record of balanced budgets in 2014- 2018. Nonetheless, as the transfers stem from a 'bb' rated counterparty we assess the city's overall revenue robustness as Weak.
Revenue Adjustability: Weaker Yerevan's ability to generate additional revenue in response to possible economic downturns is very limited, therefore we assess the city's revenue adjustability as Weak. The central government holds overwhelming fiscal authority, which significantly limits the city's fiscal autonomy. The city's autonomy to set rates or introduce new taxes is limited by the country's legal framework. Yerevan collects taxes on property and vehicles, which together represent 15% of the city's total revenue. The city also collects various fees, fines and payments (non-tax revenue), which accounted for 13% of its total revenue in 2018.
Expenditure Sustainability: Midrange The city exerts prudent control of its expenditure. This is evident from the track record of the decrease in spending being greater than that of declining revenue in 2016-2018 (4.6% and 3.9%, respectively). We expect these practices to be continued in the medium term. Yerevan has responsibilities in education, healthcare, some social benefits, general public administration, environmental protection, culture and recreation, and housing, utilities and construction. Education and healthcare spending, which is of a counter- or non-cyclical nature, accounted for 32% of the city's expenditure in 2018. Yerevan is not required to adopt anti-cyclical measures, which would inflate expenditure related to social benefits in a period of downturn. At the same time, the city's budgetary policy is dependent on the decisions of the central government, which could negatively affect the expenditure dynamic. Expenditure Adjustability: Weaker Fitch assesses Yerevan's expenditure adjustability as low. Most of its spending responsibilities are mandatory, with inflexible items dominating the expenditure structure. Therefore the bulk of expenditure could be difficult to cut in response to potential revenue shrinking. Although the city retains some flexibility to cut or postpone capex in case of stress, capital outlays were already reduced to an average of 7.7% of total spending in 2015-2018 from the higher level of 24.7% in 2014, following a prolonged economic slow-down in Armenia. The city's ability to materially cut expenditure is also limited by relatively low per capita expenditure (2018: USD130) compared with international peers.
Liabilities and Liquidity Robustness: Midrange According to national budgetary regulation, Armenian local and regional governments (LRG) are subject to strict debt limitations. Therefore the city has been free of any debt or guarantees 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 and new borrowing restrictions as well as limits on annual interest payments.
Liabilities and Liquidity: Weaker Yerevan's liquidity position improved in 2018 to AMD7.8 billion from AMD1.9 billion in 2017, as the city posted a surplus budget with excess cash retained in reserves. Yerevan holds its cash in treasury accounts as deposits with commercial banks are prohibited under the national legal framework for LRGs. For extra liquidity the city could borrow from the national treasury. As the liquidity profile remains exposed to volatility, while counterparty risk associated with the liquidity providers is 'BB-', which limits the assessment of this risk factor to Weaker.
Debt Sustainability Assessment: 'aaa' Fitch classifies Yerevan as a type-B local and regional government (LRG), as it covers debt service from cash flow on an annual basis. According to our rating case, Yerevan's debt payback ratio (net direct risk-to-operating balance) - the primary metric of debt sustainability assessment - will remain strong over the next five years due to sufficient cash and very low expected debt, stemming from the city's public sector. The secondary metrics - fiscal debt burden measured as net adjusted debt-to-operating revenue and actual debt-servicing coverage ratio - are assessed at 'aaa'. This leads to the city's overall debt sustainability assessment at 'aaa'.
DERIVATION SUMMARY Yerevan's Standalone Credit Profile (SCP) of 'bbb-' is based on a combination of a 'Weaker' risk profile and a debt sustainability assessment of 'aaa'. The SCP also factors in international peer comparison. Finally, the city's IDR remains constrained by that of the sovereign
To recall, on November 22, 2019, Fitch Ratings upgraded the long-term issuer default ratings (IDRs) in foreign and national currency for Armenia by one scale - to the level of with the forecast "Stable". In addition to the sovereign rating, Fitch also raised the upper limit of Armenia's ratings for long-term sovereign bonds in foreign and national currency to "BB" (country ceiling), due to which Armenian private companies and financial institutions can get a rating (BB-) for bonds in foreign and national currency. Fitch Ratings kept short-term IDRs of Armenia in foreign and national currencies at . The decision to upgrade Armenia's sovereign rating is based on Fitch's assessment that the institutions of Armenia contributed to a peaceful and smooth political transition and will be further strengthened through structural reforms. The government has reaffirmed its commitment to pursuing sustainable macroeconomic policies and structural reforms, including the fight against corruption and monopolies, as well as strengthening institutions and governance.