Fitch affirms Estonian city of Tallinn at A
The ratings reflect the city's strong financial and debt management practices, projected moderate debt over the medium term and its low contingent liabilities. They also take into account the city's wealthy and diversified local economy, although it is vulnerable to the economic downturn in Europe due to its small size and its reliance on European export markets.
The Stable Outlook reflects Fitch's expectations that, although the city's operating margin may weaken to about 5% in 2013 from 6.1% in 2012 following the introduction of free public transport in the city, the city will be able to restore its margin to about 7% in 2014-2015.
Fitch expects the city's direct risk to remain moderate in 2013-2016, at 55% of current revenue. In nominal terms it may reach EUR260m in 2016, up from the EUR230m projected for 2013. The city has advanced debt management practices, aimed at limiting debt costs and securing a smooth debt repayment schedule, through refinancing of existing obligations. The city's cash position is reasonably strong, with EUR30m held in its accounts in Q1-Q3 2013.
Fitch expects Tallinn's indirect risk to rise to about EUR70m at end-2013 from EUR57m at end-2012, but to remain low. Its indirect risk is related to its municipal companies' debt-financed investments. Such debt is kept low under strict control and counts towards the city's debt limits.
The city follows a prudent budgetary policy to maintain positive operating results and to comfortably cover annual debt service. Fitch therefore expects Tallinn's operating balance to cover debt service (projected at EUR25m per year in 2014-2016) by at least 1x and with debt-to-current balance remaining below its average debt maturity (10 years at end-2012). In 2012, the operating balance was EUR25.5m, covering debt service by 1.15x.
Tallinn, being the economic centre of Estonia, produced 48.8% of national GDP in 2010 and is host to 41% of Estonian companies. The diversified and wealthy economy results in high tax revenue for the city. However, given the country's small size relative to Europe, the city's economy is vulnerable to economic contraction in Europe. Fitch expects Estonia's real GDP will grow by about 3% in 2013-2014, down from 7.6% in 2011. ■