RIGA - The city of Riga saw its investment rating fall last week, though city
leaders said the decision taken by a major rating agency came as no
surprise.
Standard & Poor's reported that it lowered its long-term issuer credit
ratings on the Latvian capital to BBB- from BBB and affirmed its A-3
short-term issuer credit rating.
At the same time, Standard & Poor's revised the outlook on the city to
stable from positive.
"The downgrade reflects the financial and monitoring difficulties that the
city has experienced in 2003 and the rapid accumulation of debt, despite
strong economic growth," Standard & Poor's credit analyst Bram Cartmell
said.
According to the agency, real GDP in Latvia is forecast to grow by between 6
percent and 7 percent in 2003 and to continue at a similar rate over the
medium term. But despite this trend, the city of Riga needed central
government support for the refinancing of short-term debt worth 51 million
lats (80.7 million euros).
Riga's appeal to the state government to back the debt refinancing required
an amendment to the state budget, as well as presidential approval.
With state guarantees in place, Standard & Poor's expects the city to attain
sufficient funds to fully refinance the debt, which was mainly created by
short-term debts accumulated by municipal companies and accounts managed by
the city's settlements center.
The refinancing will increase long-term direct debt to about 43 percent of
2003 budgeted operating revenue, which is high compared to the debt profile
of similarly rated local governments. Although the city hopes to refinance
the debt over 10 years, this maturity profile has yet to be secured from the
banks.
Finance Minister Valdis Dombrovskis said that credit rating fall did not
surprise the government, which blames city authorities for the downgrading.
"This is where the irresponsible financial policies of the Riga City Council
have lead to," said Dombrovskis, adding that he now expects the city to take
real steps in improving its fiscal situation and renewing trust in the its
financial stability.
According to Dombrovskis, the lowering of the rating is due to the
uncontrolled rise in the city's debt and an overall lack of financial
control in the city.
Riga City Council finance department head Karlis Kavacs said that he was
pleased with the outcome.
"That's fantastically good that the credit rating has remained at the BBB
level!" he exclaimed. "Seeing as Riga has shown its true financial situation
this year, discovered short-term debts of 51 million lats, which are
expected to be refinanced, this is a stable credit rating, which means that
one can invest in Riga," said Kavacs.
Kavacs added that the credit rating might not have been lowered at all if
the city had announced a timely tender for refinancing the short-term debts.
Mayor Gundars Bojars pointed the finger at the government of Prime Minister
Einars Repse. He said that the Cabinet only wants to criticize and not
improve the situation.
"No initiatives are being announced, no fresh ideas on how to make money,
but only how to save," said Bojars, referring to Repse's recent campaign to
slash government spending.
Riga accounts for one-third of Latvia's population but about one-half of the
country's wealth, and it normally outpaces national economic growth. Despite
the link between economic and infrastructure development, the city has had
to reduce investment. Capital expenditure accounted for about 30 percent of
total spending over the past three years; in 2003, however, it is budgeted
to account for less than one-half this amount.
Riga is likely to issue debt in order to make the vital large capital
improvements needed in the run up to EU membership, stated Standard & Poor's
in its report, although its capacity for significant additional debt
issuance has been reduced by the refinancing.
With central government backing in place, the city should be able to
complete the refinancing in 2003 and finish the year with a balanced budget.
"Improvements in debt management and transparency, especially with regard to
the Riga Settlement Center, are still necessary," said Standard & Poor's
Cartmell.
