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Moody's upgrades City of Riga's rating to Baa1.

Summary: stable outlook

Moody's Investors Service EMEA Limited

("Moody's") has today upgraded the issuer rating of the City of Riga to

Baa1 from Baa2. The outlook on the rating is stable.

The main drivers of the rating action are (1) the strengthening of Latvia's credit profile as captured by the upgrade in the sovereign government bond rating to A3 from Baa1, as Riga has close macroeconomic and financial linkages with the central government; and (2) Riga's track record of solid financial performance, which Moody's expects to continue in the medium-term.

Given its status as the country's economic engine, Riga is the primary contributor to Latvia's economic rebound. Riga's GDP per capita exceeds the national average by almost 70% and generates about 50% of national GDP. The city receives approximately 80% of its operating revenue from the central government in the form of shared taxes and intergovernmental transfers.

An increase in the tax-sharing allocations and tight expenditure controls have enabled Riga to outperform its budgetary targets. The city recorded a sound operating surplus in 2014, accounting for 8% of operating revenue, which coupled with prudent financial management and clearly defined internal policies and procedures will likely continue to support the city's operations. Riga reverted to a financing surplus of 1% of total revenue in 2014 compared with a deficit of 3% in 2013. In this context, Moody's expects the city to register a surplus in the range of 1%-2% of total revenues in 2015-16.

However, Moody's notes that the Baa1 rating also incorporates Riga's limited revenue-raising flexibility as well as the city's very high debt burden, due to Riga's off-balance sheet financing of some investments in the past, which stood at 134% of operating revenue in 2014. Moody's expects that growing revenues and a prudent approach to capital investments will lead to the gradual reduction of Riga's net direct and indirect debt level in the next two years.

The stable outlook on the City of Riga's rating mirrors the outlook on Latvia's sovereign rating.

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Publication:EMBIN (Emerging Markets Business Information News)
Geographic Code:4EXLA
Date:Feb 17, 2015
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