Norwegian Municipality of Stavanger 'AA+/A-1+' Ratings Affirmed; Outlook Positive

12 May 2024 16:23 CEST

May 12, 2024

Overview
- We project Stavanger's operating performance will improve slightly in
2024-2026 thanks to
strong tax revenue growth and prudent budgetary management.
- That said, Stavanger's high investment needs will keep deficits after capital
accounts from
shrinking to historical levels, resulting in moderate debt build-up through
2026.
- The municipality sustains conservative financial policies, however leading us
to assume that its
liquidity position will remain very strong.
- We therefore affirmed our 'AA+/A-1+' ratings on Stavanger. The outlook is
positive.

Rating Action
On May 10, 2024, S&P Global Ratings affirmed its 'AA+/A-1+' long- and short-term
issuer credit
ratings on the Norwegian Municipality of Stavanger. The outlook is positive.

Outlook
The positive outlook reflects our view that Stavanger's financial indicators
might be stronger than
our current projection on the back of management's ability to handle large
investments needs
amid the current high-cost environment.

Upside scenario
We could raise the ratings in the next 24 months if we observe that management's
budgetary
discpline and prudent debt and liquidity policies yield a stronger budgetary
performance and slow
debt accumulation.

Downside scenario
We could revise the outlook to stable if we observe that cost pressure and
persitently high capital
spendingresult in budgetary deficits and continued debt build-up.
We could also revise the outlook to stable if systemic support to Norwegian
local and regional
governments (LRGs) became insufficient and central government policies do not
adequately
address debt build-up in the sector.

Rationale
Although we see a weakening trend for the institutional framework for Norwegian
LRGs, we
continue to assume that Stavanger's management can contain debt accumulation
through
budgetary discipline vis-á-vis internal financial targets, despite cost
pressures from high
investment needs. Stavanger's track record of gradually strengthening liquidity
while maintaining
a stable debt burden illustrates improvements in the municipality's debt and
liquidity
management. We also take into account the local economy's resilience, with
sustained solid
budgetary performance, to economic downturns and related factors, such as oil
price shocks.

Stavanger's very wealthy local economy and competent financial
management are key credit strengths
We continue to regard the institutional framework for Norwegian LRGs as
extremely predictable
and supportive. That said, we revised the trend to weakening to reflect our view
of persistent
mismatches between revenue and total expenditure, particularly in the capital
accounts. This has
caused Norwegian LRGs to accumulate debt, and central government policies have
not adequately
addressed this build-up. Nevertheless, the very strong system support gives
Norwegian LRGs a
high degree of institutional stability, and there are mechanisms in place to
ensure that the LRGs
do not experience financial distress. If debt levels continue to rise, however,
the ensuing
uncertainty about the sector's debt burden, alongside the LRGs' limited autonomy
to adjust
revenues, would raise questions about the system's predictability.
Importantly, Stavanger benefits from Norway's very high wealth levels,
illustrated by our forecast
of GDP per capita of about $87,000 in 2024. We expect the Norwegian economy to
expand by 1% in
2024, thanks to recovering consumption and increasing investments, slightly up
from 0.5% growth
in 2023. Income levels in Stavanger are very high, and we assume that the local
GDP per capita
exceeds Norway's. Although the city is the center of Norway's oil and gas
industry, it has a fairly
diversified employment profile, with the public sector playing a dominant role.
Stavanger is
Norway's fourth-largest municipality and the country's southwestern regional
center and
administrative hub. As such, we assume that, over the medium term, the
municipality can
withstand even a considerable decrease in oil prices without its economy taking
a pronounced hit.
Our view of Stavanger's management as prudent and competent is another important
consideration in our analysis. The municipality has a track record of
reinforcing budgetary
discipline with cost controls. The in-house treasury management has strong
expertise in capital
markets, good monitoring mechanisms, and prudent liquidity management. Although
the ruling
political coalition in Stavanger is broad and consists of a six-party majority,
there seems to be a
consensus on key policy areas across the political spectrum and the new
management team
following last year's local election.

Stavanger will likely uphold solid budgetary performance, despite its high
investment needs
We expect Stavanger to deliver stable operating performance thanks to its
cost-control measures,
alongside strong tax revenue growth. This should keep after-capex deficits
contained. Solid tax
revenue growth should endure through 2026, in line with an anticipatedrebound of
the general
economy and real wage increases. Considering inflation rates observed in 2023
and early this year,
we project revenue growth will outpace expenditure from 2024. In addition, we
expect central
government transfers, or grants, will partly compensate for cost increases.
Moreover, although
lingering concerns regarding the ongoing oversight of the municipal equalization
system could
lead to revisions that disadvantage municipalities more than larger cities, we
do not expect any
resulting changes to materially affect Stavanger's operating performance.
We project capital investments will stay high. The municipality's population is
expanding, and
some of the municipal properties, such as schools and care facilities, face
sizable refurbishment
needs. We therefore expect Stavanger's deficit after capital expenses to be 4.8%
of total revenue
this year, after last year's peak at 6.1%, then shrink to 1.4% by end-2026.
Consequently, we forecast additional, yet contained, net borrowing. This would
lift tax-supported
debt to approximately 89% of consolidated operating revenue by end-2026, from
84% in 2023. In
calculating tax-supported debt, we include debt on-lent to municipal companies,
loans to
households via state-owned Husbanken, and guarantees to government-related
companies and
associations. Stavanger also has extended guarantees to toll-road company Ferde
AS and waste
and water company IVAR IKS. However, we consider these entities financially
sound on their own
merits. Therefore, we neither include them in tax-supported debt, nor believe
they present
significant off-balance-sheet risk.
Underpinned by Stavanger's prudent liquidity management policies, we consider
liquidity as a
credit strength. The municipality ensures that cash is readily available to
cover upcoming liquidity
needs. This, together with the phase-out of commercial paper debt and the long
average maturity
of its debt portfolio, has helped the municipality improve its liquidity
position in recent years.
Stavanger's cash and liquid assets (without contracted funding) cover 160% of
debt service and
funding needs over the next 12 months. Based on the debt maturity profile and
liquidity levels, we
anticipate that Stavanger's liquidity coverage will remain healthy. The
municipality had
approximately Norwegian krone (NOK) 1.3 billion of bank deposits in December
2023. In addition
to cash, the city had NOK500.0 million in a committed credit facility, about
NOK1.6 billion in
short-term liquid investments, and a long-term portfolio invested in mostly
liquid assets such as
Norwegian bonds and listed equities, which we include in our liquidity
assessment. Moreover, we
consider Stavanger to have strong and reliable access to capital markets, as
well as to
central-government-owned public sector funding agency Kommunalbanken, which
further
supports our view of Stavanger's liquidity position.

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