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"Moody's" changes outlook on Riga's Baa3 rating to positive from stable; rating affirmed

 RIGA, March 19 - Today, "Moody's Investors Service" changed the outlook of the Riga's Baa3 rating to positive from stable. The Baa3 issuer rating was affirmed.

Today's action follows "Moody's" decision to upgrade Latvia's government bond rating to Baa2 from Baa3 on March 15, 2013, with positive outlook.

"Moody's" decision to change the outlook follows the upgrade of Latvia's government to Baa2, reflecting the macroeconomic and financial linkages between the sovereign and the Latvian municipality. National economic growth is resilient at over 5 percent in the past two years and forecasts are favorable, which will support an increase in the city's income stream. Riga receives approximately 80 percent of its operating revenue from the central government in the form of shared taxes and intergovernmental transfers.

The positive outlook also takes into account the city's cautious budgetary management, which was effective under a very severe economic recession in 2009 and 2010. The city's gross operating balance (GOB) improved to 10 percent of operating revenue in 2012 from 8 percent in 2011, thanks to the increased proceeds from personal income tax and a tight spending policy. Riga's rating is underpinned by its balanced financial performances and good liquidity position, averaging 22 percent of operating revenue in 2012, explains "Moody's".
The economic recovery at both national and local levels is expected to result in growing tax-sharing allocations for Riga, which will strengthen its operating performance. In this context, "Moody's" expects the city to release balanced budget results in 2013-14.

Nevertheless, "Moody's" notes that the Baa3 rating also factors in Riga's limited revenue raising flexibility as well as sizeable off-balance sheet liabilities due to city's engagement in off-balance financing of some investments in the past, which led to the accumulation of high debt burden. "Moody's" expects that growing resources and a prudent approach to capital investments will lead to the gradual reduction of Riga's debt level.
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