The Standard&Poor's credit rating agency has affirmed the BB- speculative-grade credit rating for the City of Zagreb, with a negative outlook, warning of the negative impact of the coronavirus pandemic on budget revenues and the still unclear government support for post-earthquake reconstruction.

S&P downgraded Zagreb’s rating from BB to BB- in September 2020, noting that the city would have to cover 20 percent of reconstruction costs related to the March 2020 earthquake, which would significantly increase its contingent liabilities.

Reconstruction costs will probably be somewhat lower than expected, the agency says in its latest report, affirming the current BB- rating and noting that in the period from 2021 to 2023 the city’s budget performance would probably be affected by a drop in revenue from local rates caused by the pandemic.

S&P says the negative outlook reflects its assessment that long-lasting pressure on budget revenue could postpone the start of the necessary reconstruction of the city centre.

The government’s support is still unclear, including the answer to the question when the city would be given access to money for repair work, S&P says.

For the period until 2023 the agency forecasts a deficit in the city budget, due to a drop in revenue from local rates, as well as lower outstanding liabilities as the city is expected to obtain funds from the EU and the government for infrastructure repairs even though neither the amount nor the date of payment have been set.

S&P notes that in the next 12 months it could lower the ratings if the financial pressure on Zagreb and the city-owned companies continues to rise, which would result in a fast accumulation of payables and a worsening of the financial situation in conditions of reduced government support after local elections in May.

The outlook could change to stable in the next 12 months if Zagreb restores financial flexibility, evidenced, for example, by stable budget performance and an improved monetary position or reduced financial obligations.