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25.10.2013

S&P revises Minsk outlook to Stable from Positive 6

11:14, — Economics

S&P revises Minsk outlook to Stable from Positive

Standard & Poor's Ratings Services revised the outlook on the Belarusian capital Minsk to Stable from Positive on 25 October 2013.

At the same time, the agency affirmed the long-term issuer credit rating on the city at 'B-', reads the press release of the agency.

The agency affirmed its rating on Minsk at 'B-' and revised the outlook to Stable following its similar action on Belarus (outlook on Belarus was revised to Stable on weakening external liquidity; the ratings were affirmed at 'B-/B').

The rating on Minsk reflects our view of the volatile and underfunded institutional framework for local and regional governments (LRGs) in Belarus, which limits the city's budget predictability and flexibility. Moreover, Minsk displays modest wealth levels and negative management, and has high contingent liabilities. Factors supporting the rating are strong budgetary performance, neutral liquidity, and a low debt burden, says S&P.

We cap the rating on Minsk at 'B-', the level of the Belarusian sovereign foreign currency rating, according to our assessment of the institutional framework for intergovernmental relationships between the central government and its LRGs. We do not consider that a Belarusian LRG can be rated above the sovereign. However, in accordance with our criteria, we have assigned an "indicative credit level" (ICL) of 'b+' to Minsk, the agency said.

Given the concentration of the national economic growth in Minsk (the city accounts for about 30% of the national GDP) and the relatively high inflation, the city's revenue growth will likely continue to exceed operating spending growth rates in the medium term. This will result in strong operating margins of over 25% on average in 2013-2016 after exceptionally strong margins in 2011-2012 (when average operating surpluses exceeded 40%), according to our base-case expectations, the agency said.

The city maintains high capital spending both directly and via municipal companies and is heavily involved in the local economy, which exposes it to large contingent liabilities. It has also committed to an ambitious housing-construction program and large-scale infrastructure upgrade ahead of hosting the 2014 IIHF World Championship. This puts pressure on the city's investment budget. However, given that the central government legally constrains Belarusian LRGs' deficits (in 2012-2013 local governments were not allowed to deliver deficits at all, for example), the city's average deficit after capital accounts in 2014-2015 will be limited to about 2%-3% of total revenues, reads the press release.

Due to solid operating performance and legal limits on direct borrowing, the city's tax-supported debt will likely stay below 30% of operating revenues in the medium term. The larger share of the debt burden (over 70%) will be accounted for by guarantees against municipal companies' borrowings, according to our base case. By year-end 2013, tax-supported debt should be a low 20% of adjusted operating revenues., the agency noted.

Because our ICL on Minsk is 'b+' and the rating is capped at 'B-', we don't currently envisage a realistic scenario under which the ICL would weaken by three levels to below the sovereign rating. Consequently, we would be more likely to downgrade Minsk as a result of a downgrade of Belarus than as a result of a weakening of the ICL within the next two years, S&P said.

S&P said it could raise the rating on Minsk within the next 12 months, however, if they were to raise the ratings on Belarus.

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