Fitch Ratings-Moscow/London-30 November 2018: Fitch Ratings has affirmed the Armenian City of Yerevan’s Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) at ‘B+’ with Positive Outlooks and Short-Term Foreign-Currency IDR at ‘B’.
The affirmation reflects Fitch’s unchanged rating case scenario regarding the city’s satisfactory fiscal performance amid Armenia’s weak institutional framework for local and regional governments (LRGs), nonetheless supported by steady transfers from the central government. The ratings also factor in the city’s capital status and zero debt. The Positive Outlook reflects that on the sovereign ratings.
KEY RATING DRIVERS
Institutional Framework (Weakness)
Yerevan’s ratings remain constrained by those of Armenia (B+/Positive), in particular the country’s institutional framework for LRGs, which Fitch assesses as weak. It has a shorter track record of stable development than many international peers. Weak institutions lead to lower predictability of Armenian LRGs’ budgetary policies, narrow their planning horizon and hamper long-term development plans.
Fiscal Performance (Neutral)
In line with Fitch’s unchanged rating case, we expect the city to continue posting a satisfactory fiscal performance with a single-digit operating margin in 2018-2020 (2017: 2.9%). We expect an improvement of the city’s operating margin on the back of projected economic growth over the medium term in Armenia. Yerevan’s interim overall surplus was 15% of total revenue at end-September 2018, while the city had collected only about 60% of the annual revenue. We expect the city will post close to balanced budgets in 2018-2020 (2017: surplus 0.7%).
Due to statutory arrangements, Yerevan’s fiscal performance remains dependent on financial aid from the central government. We believe the city will continue receiving financial support from the central government in line with its solid track record. Current transfers stood at 72% of the city’s operating revenue in 2017. The city’s capex was 7.3% of total spending at end-2017, in line with the previous year’s low point when it dropped to 7.0% from an average of 19.5% in 2013-2015.
We project a gradual improvement in capexrealisation up to 8%-9% of total expenditure in 2018-2020. Most of the city’s capex is funded by central government transfers and donor grants, supplemented by asset sales.
Debt and Other Long-Term Liabilities (Neutral)
At end-September 2018, Yerevan was free from any debt or guarantees. The city has maintained its 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 sound, with average monthly cash holdings of AMD7.5 billion as of end-September 2018 (2017: AMD1.9 billion). The city holds its cash in the national treasury, earning AMD178 million of interest revenue as of end-September 2018.
Economy (Weakness)
Yerevan is likely to benefit from the projected economic recovery in Armenia over the medium term. In its recently updated macro forecast, Fitch expects full-year growth of the national economy at 4.7% yoy in 2018 and 4.1% yoy in 2019. 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 wealth metrics remain relatively modest in the international context, as we estimate Armenia’s 2017 GDP per capita at USD3,928 using market exchange rates.
Management and Administration (Neutral)
Yerevan’s administration demonstrates adherence to a prudent fiscal policy aimed at balanced budgets, while central government remains a key funding source for the city. Due to institutional limitations, the city’s planning horizon is rather short – bound to one fiscal year – which hinders the administration’s forecasting ability and complicates strategic planning and investments allocation.
On 23 September 2018, Yerevan’s city council was re-elected ahead of schedule, following power reshuffling in Armenia. Despite a change in the governing political coalition, the municipal administration is functioning smoothly taking care of uninterrupted provision of services and budget management.
