Downturn hurts municipal budgets
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Hürriyet Daily News
Oluşturulma Tarihi: Mayıs 19, 2009 10:11
ISTANBUL - Turkish municipalities are currently facing a challenging combination of a severe economic downturn and tight funding environment, Moody's Investors Service, a provider of independent credit ratings, research and financial information, said last week.
Municipal budgets are exposed to the slowdown as a high proportion of their revenue comes from national shared taxes, Moody's said in a report. These taxes include mainly value-added tax, corporate and personal income taxes.
To date, growing revenues stemming from robust growth have helped municipalities to record buoyant operating performances and control their debt requirements, Moody’s said. However, with sharp deterioration of economic conditions, tax collection is shrinking, directly impacting budgets for 2009-2010. Overall, municipalities display limited shock absorption capacity in view of the very limited control on revenues and the socially-sensitive responsibilities, it said.
"In the near future, Turkish municipalities will be required to exercise fiscal discipline and to leverage their expenditure flexibility - primarily on the capital side of the budget - to manage budgetary pressures," said Francesco Soldi, assistant vice president at Moody's and author of the report.
In addition, municipalities have been affected by the recent credit market dislocation and are expected to continue facing tight liquidity conditions, according to Soldi. "Risk aversion of investors has heightened and foreign capital flows have declined considerably, causing a widening of spreads, tighter lending conditions and shorter maturities on foreign-denominated borrowings. Such adverse conditions are unlikely to retrench this year," Soldi said.
Whilst Moody's positively notes that the restricted access to foreign financing has been partially mitigated by increased accessibility to the domestic market, risk premiums requested by lenders are still high and overall funding conditions remain tight. In this context and given the centralistic architecture of Turkey's local public sector, the policy response of the government will strongly influence the municipal sector's financial performance and stability, according to Moody's.
To date, growing revenues stemming from robust growth have helped municipalities to record buoyant operating performances and control their debt requirements, Moody’s said. However, with sharp deterioration of economic conditions, tax collection is shrinking, directly impacting budgets for 2009-2010. Overall, municipalities display limited shock absorption capacity in view of the very limited control on revenues and the socially-sensitive responsibilities, it said.
"In the near future, Turkish municipalities will be required to exercise fiscal discipline and to leverage their expenditure flexibility - primarily on the capital side of the budget - to manage budgetary pressures," said Francesco Soldi, assistant vice president at Moody's and author of the report.
In addition, municipalities have been affected by the recent credit market dislocation and are expected to continue facing tight liquidity conditions, according to Soldi. "Risk aversion of investors has heightened and foreign capital flows have declined considerably, causing a widening of spreads, tighter lending conditions and shorter maturities on foreign-denominated borrowings. Such adverse conditions are unlikely to retrench this year," Soldi said.
Whilst Moody's positively notes that the restricted access to foreign financing has been partially mitigated by increased accessibility to the domestic market, risk premiums requested by lenders are still high and overall funding conditions remain tight. In this context and given the centralistic architecture of Turkey's local public sector, the policy response of the government will strongly influence the municipal sector's financial performance and stability, according to Moody's.