Home Ratings and Research Currently valid ACRA Europe affirms unsolicited rating of A- to STROPKOV, changes outlook to Negative
ACRA Europe affirms unsolicited rating of A- to STROPKOV, changes outlook to Negative
Friday, 05 June 2020

The rating assigned to the city of Stropkov remains unchanged and is mainly based on a positive assessment of low indebtedness, high short-term liquidity, and sufficient operating balance surpluses in previous years. ACRA Europe has downgraded the rating outlook from Stable to Negative given the increased likelihood of the following critical factors:

-       The risk of higher indebtedness of the city in 2020;

-       The risk of an operating balance deficit in the city’s budget at the end of 2020.

The two-month slowdown in the Slovakian economy will lead to recession, and also impact municipal budgets. According to the latest economic forecasts, a shortfall in the share of tax revenues of approximately 7% is expected due to the ongoing coronavirus crisis. The Agency assumes that the city of Stropkov will try to offset the shortfall of income by reducing some operating and capital expenditures, or by postponing them to later periods. The shortfall in the share of tax revenues will negatively affect the City’s operating budget, which is expected to be in deficit in 2020. In 2017–2019, the City’s operating budget was in surplus, the volume of which exceeded the debt service by more than three times on average. This allowed the city to create a fair volume of reserves, which may be used in the crisis year of 2020. Nevertheless, the City expects to use short-term overdraft resources to bridge the gap between operating budget revenues and expenditures. A deterioration of regional indicators is also expected.

Rating components

Institutional Factors

 

Governance and Fiscal Flexibility

Moderate

Budgetary and Management Performance

Very high

Political Environment

High

Transparency

Very high

Final assessment

 High

Financial Factors

 

Debt Profile

Very high

Liquidity Profile

Very high

Operating Balance

Moderate

Regional Economy

Moderate

Final assessment

Very high

Extraordinary Support

 

Final assessment

High

Overall score

Very high

Final rating

A-


Outlook: Negative

The negative outlook has been assigned based on the expectation of the risk of higher indebtedness of the City in 2020 and the risk of an operating balance deficit in the City’s budget at the end of 2020.

The negative outlook assumes that the rating will most likely change within the 12-month horizon.

Key assumptions

  • Indebtedness will not increase significantly compared to the 2020 forecast;
  • The short-term liquidity ratio will not reach levels lower than those forecast for 2020;
  • The operating budget will reach a surplus compared to the forecast for 2020.

Potential outlook and/or rating change factors

A positive rating action may be prompted by:

  • Significantly lower debt levels than forecast for 2020;
  • Significantly higher operating budget surplus compared to 2019;
  • Significantly higher use of capital grants than forecast for 2020;
  • Significant improvement in macroeconomic indicators in the Slovak Republic for 2020.

The likelihood that the positive rating action factors will be fulfilled during the rating period is considered to be low.


A negative rating action may be prompted by:

  • Significantly higher shortfall in operating budget income than forecast for 2020;
  • Significantly higher debt levels than forecast for 2020;
  • Significant deterioration of liquidity indicators compared to 2019;
  • Significant deficit in operating balance or significantly lower level of operating budget surplus compared to 2019.

The likelihood that the negative rating action factors will be fulfilled during the rating period is considered to be low.

In ACRA Europe‘s complementary assessments, an extraordinary support analysis with the sovereign rating are also taken into consideration. The full rating report in Slovak is available here.

Appendix 1. Budget Execution Reports for 2017–2019 in thous. EUR

Budget item

Execution

Dec 31, 2017

in %

Execution

Dec 31, 2018

in %

Execution

Dec 31, 2019

in %

Current income total

8,189

102%

9,136

98%

10,432

104%

Tax income

4,666

102%

5,094

104%

5,635

102%

Non-tax income

693

109%

1,025

101%

1,191

130%

Grants and subsidies

2,830

101%

3,017

103%

3,606

101%

Current expenditure total

7,522

98%

8,369

98%

9,575

98%

Interest expenses

29

104%

25

100%

22

99%

Current account surplus/deficit

667

x

767

x

857

x

Capital income total

757

99%

340

170%

1,171

97%

Income of property sold

294

116%

158

173%

109

87%

Capital grants and subsidies

463

90%

182

167%

1,062

98%

Capital expenditure total

1,415

92%

1,009

96%

1,429

96%

Capital account surplus/deficit

-658

x

- 669

x

-258

x

Financial operations, income

576

90%

755

112%

607

95%

Loans from banks

0

100%

0

100%

200

100%

Financial operations, expenditures

223

100%

263

100%

300

170%

Principal payments

223

100%

195

100%

169

100%

Financial account surplus/deficit

353

x

492

x

307

x

TOTAL INCOME

9,522

101%

10,231

103%

12,210

104%

TOTAL EXPENDITURE

9,160

97%

9,641

98%

11,304

99%

TOTAL BUDGET SURPLUS/DEFICIT

362

x

590

x

906

x

Sources: 2017–2019 Budget execution reports for the city of Stropkov, ACRA Europe’s calculations

Appendix 2. Balance Sheet for 2017–2019 in thous. EUR

Balance item

Dec 31, 2017

Dec 31, 2018

Dec 31, 2019

Assets

     

Fixed Assets:

19,694

19,242

19,712

Intangible assets

4

34

36

Tangible assets

17,477

16,995

17,463

Long-term financial assets

2,213

2,213

2,213

Short-term assets:

9,425

9,211

9,491

Stock

6

6

12

Settlements

7,988

7,835

7,640

Long-term receivables 

0

0

0

Short-term receivables

236

279

315

Cash and equivalents

1,195

1,091

1,524

Repayable financial assistance

0

0

0

Accruals

67

0

0

TOTAL ASSETS

29,186

28,453

29,203

Liabilities

     

Equity/Funds

20,471

20,518

20,697

Liabilities

2,374

2,105

2,219

Long-term liabilities

1,301

1,291

1,208

Short-term liabilities

689

443

378

Reserves

2

2

2

Bank loans and financial assistance

380

230

307

Settlements

2

139

324

Accruals

6,341

5,831

6,287

TOTAL LIABILITIES

29,186

28,453

29,203

Sources: 2017–2019 Financial statements for the city of Stropkov, ACRA Europe's calculations

Appendix 3. Multiannual City Budget for 2020–2022 in thous. EUR

Budget item

Budget for 2020

(after changes)

Budget for 2021

Budget for 2022

Operating income total

9,974

10,366

10,576

Tax income

5,351

6,001

6,333

Non-tax income

685

724

724

Grants and subsidies

3,938

3,641

3,519

Operating expenditure total

10,171

9,844

9,943

Interest expenses

21

21

19

Operating account surplus/deficit

-197

522

633

Capital income total

481

0

0

Income of property sold

87

0

0

Capital grants and subsidies

394

0

0

Capital expenditure total

1,054

172

185

Capital account surplus/deficit

-573

-172

- 185

Financial operations, income

921

0

0

Loans from banks

0

0

0

Financial operations, expenditures

151

132

88

Principal payments

151

132

88

Financial account surplus/deficit

770

-132

-88

TOTAL INCOME

11,376

10,366

10,576

TOTAL EXPENDITURE

11,375

10,148

10,216

TOTAL BUDGET SURPLUS/DEFICIT

0

218

360

Sources: 2020–2022 Multiannual budget forecast for the city of Stropkov, ACRA Europe's calculations

Appendix 4. List of Material Data Sources

Internal data sources

External data sources

Budget execution reports for 2017, 2018, and 2019

Ministry of Finance of the Slovak Republic

Balance sheet for Dec 31, 2017, Dec 31, 2018, and Dec 31, 2019

Statistical Bureau of the Slovak Republic

Notes to financial statements for Dec 31, 2017, Dec 31, 2018, and Dec 31, 2019

Eurostat

Budget forecast for 2020 and Multiannual city budget for 2021–2022

World Bank

Budget amendments in 2020

National Bank of Slovakia

2019 City controller report on control results

Stropkov city web-page

City controller report on budget forecast for 2020 and Multiannual city budget for 2021–2022

Council for Budget Responsibility of Slovakia

 

Labor, Social Affairs and Family Office of Slovakia

Appendix 5. Important indicators relevant to the rating assessment

Indicator

2018

2019

Data source

GDP per capita in PPP (current international dollars)

34,900

36,200

IMF

GDP growth in constant prices (%)

3.9

2.4

Eurostat

Inflation, annual average rate (%)

2.5

2.8

Eurostat

Fiscal balance (% of GDP)

-1.0

-1.3

Eurostat

External debt (% of GDP)

114

112

ECB

Indicator of economic development

High income

High income

World Bank

Rating history

The rating was last released for distribution on June 7, 2019. It was revised and affirmed on December 6, 2019. After the revision, the unsolicited rating assessment was released at A-, outlook Stable.

Regulatory disclosure

The unsolicited credit rating and outlook were issued in accordance with ACRA Europe's methodology for sub-sovereign entities in the version from May 31, 2019 (available at https://acra-europe.com, Methodology section). In the same section is a rating scale including an explanation of the importance of each rating category and a default definition. Information on the rate of historical failure is available at cerep.esma.europa.eu, and the explanatory statement of the meaning of those default rates is available at https://acra-europe.com (Regulatory Framework/Disclosure). The disclosure of the unsolicited rating and outlook was preceded by the approval of the Rating Committee. Since July 30, 2012, ACRA Europe has been a registered credit rating agency according to Regulation (EC) No 1060/2009 of the European Parliament and of the Council of September 16, 2009, on credit rating agencies.

The sub-sovereign ratings and their outlook are expected to be revised within 6 months following the publication date of this press release as per the Calendar of planned sub-sovereign rating revisions and publications.

This rating is issued as an unsolicited rating. The rated entity did not participate in the credit rating assignment. ACRA Europe did not have access to the rated entity's internal documents or management. ACRA Europe, in the context of routine care, verified all sources entering the rating process and considers the scope and quality of the information entering the analytical process to be sufficient to assign a credit rating. The rated entity was notified on June 3, 2020, and after the notification there were no changes or amendments in the rating.

ACRA Europe provided no additional services to the City of Stropkov. No conflicts of interest were discovered in the course of the sovereign credit rating assignment.

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