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24.07.2008
Decrease in limitations on external loan attraction by municipal authorities of Ukraine will not lead to significant increase of their external debt
Credit-Rating considers that possible increase in the number of cities, which can get a right to attract external borrowings in a case of adoption of the alterations to the Budget of Ukraine, will not negatively affect the dynamics of external debt of the municipal authorities in mid-term. Today, only the cities with population of more than 800 000 persons are allowed to attract external loans. According to the changes offered by the Ministry of Finance of Ukraine, from 2009 this limitation will be lowered up to 500 000 persons. As a result the number of potential municipal borrowers will increase from 6 to 11 cities in the international financial markets.
It is important to notice that the key obstacle for the most of Ukrainian cities to enter the international loan markets is not a limitation in the number of city population, but financial capabilities to fulfill their obligations in full. As potential investors show interest only in loans for the amount of not less than USD50m, so the number of municipal authorities, which have sufficient amount of financial resources to serve and repay the debt, is not big. Debt instrument issues with less amounts are not liquid that negatively affects the cost of the borrowed funds. Besides the appreciation of the borrowed funds is caused by the large amounts of fixed expenditures not related ton the amount of external loan: payment for legal support, fees paid to joint bookrunners and assignment of a credit rating according to the international rating scale.
Increase in cost of the borrowed funds in the external financial markets, length of the external loan completion and currency risks stipulate the Ukrainian cities give preference to internal loans. From 2003 only two Ukrainian cities have exercised their right to attract external loans Kiev (4 loans over 2003-2007 for the total amount of USD850m) and Odessa (one loan in 2007 for the amount of CHF50m). In turn, the Ukrainian cities placed 17 municipal bond issues and attracted 4 loans over 2003-2007 in the internal financial market. In 2008 one loan has been attracted and more than 20 municipal bond issues planned to be placed.
According to Credit-Rating`s head of municipal ratings department Elena Samoylova, `The key condition for municipal authorities to exercise their right to attract external loans in full is not only the decrease in limitations, but, first of all, strengthening the financial base of the municipalities by increasing the number of revenue sources of local budgets and development of the inter-budget system.
For more information, please contact:
Information and Communication Department
Sergey Rozumyak +38 044 490 25 50
SRozumyak@credit-rating.com.ua
