Seoul Metropolitan Government #AA/A-1+# Ratings Outlook Stable

Stocks and Financial Services Press Releases Thursday August 10, 2017 17:17
S&P Global Ratings--10 Aug--S&P Global Ratings
RATING ACTION

On Aug. 10, 2017, S&P Global Ratings affirmed its 'AA' long-term issuer creditrating on Seoul Metropolitan Government (SMG). The outlook is stable. At thesame time, we affirmed our 'A-1+' short-term rating on the government.

OUTLOOK

The stable outlook reflects our expectation that SMG will continue toprudently manage its finances over the next two years. We expect that thegovernment's liquidity will remain exceptional, its budgetary performance verystrong, with after-capital account surpluses driving a steady decline in

borrowings.
Upside scenario
The sovereign credit rating on Korea (AA/Stable/A-1+) constrains the ratingson SMG. A higher rating could follow a higher sovereign rating and an improvedassessment of Korea's institutional framework.
Downside scenario

Although we consider it unlikely in the next two years, downward pressurecould occur if the government's budgetary performance deteriorates over asustained period. This could occur if SMG increases its capital expenditurebeyond our current expectations without a commensurate increase in revenue,resulting in a sharp rise in borrowings.

RATIONALE

We affirmed the rating because we expect the city will continue producinghealthy operating surpluses and maintain robust liquidity balances. This isbased on our updated base-case scenario for SMG and our extension of theforecasting horizon through 2019. We also expect debt to continue to declinesteadily as balances after capital accounts remain in surplus. SMG's financialmanagement, economy, and negligible contingent liabilities complement ourassessment of the government's credit profile. Korea's evolving but balancedinstitutional framework partially offsets these strengths.

Korea's evolving institutional landscape tempers benefits of SMG's diversifiedeconomy and capable financial management

SMG has a strong and stable financial management team. The team has ensuredthat the city has forward-looking and prudent financial management, and hascontributed to the city's strong financial position. The relationship betweenthe mayor and the local parliament remains steady.

Supporting SMG's financial management are its detailed medium-term plans foroperating and capital expenditures, and debt management. We consider its debtand liquidity policies to be prudent, as shown in its high liquidity coverageand moderate debt levels. Management's main focus is to reduce the debt of itsgovernment-related enterprises. We believe governance and oversight of itsunprofitable and highly indebted transport and not-for-profit social housingsubsidiaries is well-managed.

In our opinion, SMG has a strong economy, which we consider a rating strength.Seoul is Korea's financial and economic capital. We estimate its GDP percapita at about US$30,600. The city continues to attract widespread economicand other value-added activities, supporting diverse job opportunities withits population of 10 million. While Korea's population is ageing, we do notexpect this to have a material impact on SMG's short-term expenditures, asage-related health and pension spending remain the responsibility of thecentral government.

We assess Korea's institutional framework as evolving but balanced, andbroadly neutral for the ratings. We expect the central government to maintainclose oversight of SMG and other local and regional governments whilegovernment initiatives such as social welfare policies are implemented. Weexpect the structural shift regarding eliminating discrepancies in governmentsubsidies across Korean local and regional governments to remain a priorityfor the central government.

After-capital account surpluses support SMG's fiscal position, and debtcontinues to decline

Seoul added another year of strong operating surpluses in 2017, with theoperating balance reaching 20.5% of adjusted operating revenues. This reflectshigher revenues from a buoyant property market as well as tighter expenditurecontrol. The city's modifiable revenues (including taxes, fees and rates butexcluding central government transfers) are the strongest among LRGs in Korea,

at about 71% of SMG's cash operating revenues. Our forecasts assume SMG'sconsumption tax as a proportion of total revenues will rise to 16% through to2020, from 5% in 2010, favorably increasing SMG's revenues that are modifiableby the government. However, SMG's inability to freely change its tax ratesrestricts its budgetary flexibility.

We expect SMG's after-capital account to remain in surplus of about 2.7% oftotal revenues in 2017-2019, reflecting strong operating balances and moderatecapital expenditure. SMG's capital expenditure was 20% lower than ourexpectation in 2016, which contributed to a balance after-capital accountsurplus of just over 6% of total revenue. The city's capital expenditure plancalls for somewhat elevated spending over the next several years, under ourbase-case scenario. We therefore forecast lower after-capital surpluses thanseen in recent years. We expect SMG to spend between Korean won (KRW) 4trillion and KRW4.5 trillion on infrastructure between 2017 and 2019, which isaround 18% of its total expenditure.

Our assessment of SMG's debt burden captures the debt of itsgovernment-related enterprises (GRE) (i.e., housing subsidiary SH Corp. andmass transportation subsidiary Seoul Metro Corp.). We project the city's debtmetrics to improve through to 2019 as SMG continues its thrust to activelyreduce its GRE debt burden to about 42% of consolidated revenues, from 74% in2013. The main contributor to the debt decline is SH Corp., as a result of astreamlining of its development projects and an abundance of housing deposits.SMG continues to reduce debt in its heavily indebted mass transportationsubsidiaries. In May 2017, two GREs, Seoul Metro and Seoul Metropolitan RapidTransit Corp. (SMRT), were merged to form Seoul Metro Corp. to gainoperational synergies to further supplement debt reduction.

S&P Global Ratings views SMG's liquidity as exceptional. We estimate thatSMG's projected free cash and liquid assets will cover over 100% of annualdebt service costs in all accounts. Additionally, we assess SMG's access toexternal liquidity as strong, given our assessment of their access to a wide

range of funding options. There are no restrictions on the ability to borrowfrom domestic or international banks in onshore currency.

We assess the risks posed by contingent liabilities as very low for SMG.That's because we have already incorporated SMG's government-relatedenterprises debt onto its balance sheet. We estimate other contingent risks(such as litigation regarding guarantees provided for private infrastructureprojects) to be limited to less than 2% of operating revenues.


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