World Economic outlook - International Public Finance Outlook 2012 : Fitch Ratings says in a newly-published report that the outlook for global (non-US) local and regional governments (LRGs) remains challenging for 2012. Fitch expects negative rating actions to continue into 2012, primarily in peripheral eurozone subnationals as the contraction in economic activities has been more severe in countries such as Italy, Spain and Portugal. On the other hand, emerging market economies and those in APAC have fared better and Fitch has taken fewer negative rating actions.
The weak recovery in some countries is making the fiscal position for subnationals challenging, especially for LRGs whose revenues are closely correlated with the economic cycle. Cuts in expenditure have not been drastic enough to compensate for revenue decline. In many countries, subnationals are responsible for the delivery of essential services such as health care and education and these costs are rigid. Revenue growth in 2012 is expected to be muted and LRGs will have to review expenditure to maintain satisfactory operating balances.
In order to contain overall expenditure, many subnationals have taken drastic action to curb capital expenditure, which is the least rigid item in many budgets. This is a step back from previous years when capital expenditure was increased as part of anti-cyclical measures.
Despite drastic cut backs, the budgets of many subnationals, primarily in Western Europe, are registering deficits. Although these are estimated to be lower in 2012 than in 2011, they are still significant, meaning debt will continue to increase to fund these deficits.
Capital markets have closed for some European subnationals, particularly in the peripheral nations, heightening refinancing risk. Apart from the German Laender, there have been only limited bond issues by peripheral European subnationals in the latter part of 2011. Yields required by investors make it too expensive and new issuance was usually for shorter maturities. Forecasts for 2012 suggest no improvement and probably some deterioration from 2011.
Fiscal consolidation, deficit reductions and access to liquidity are major factors that will impact subnationals creditworthiness globally in 2012. Despite emerging market credit improvements, further deterioration of the European crisis would have a global impact and make it more difficult for sub-nationals to access long-term funding.
The full report, entitled "2012 Outlook: International Public Finance", is available at www.fitchratings.com/outlooks.
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