S&P Global Ratings assigns credit ratings to local and regional governments (LRGs) based on its qualitative and quantitative analysis of financial, economic, managerial, and institutional factors. Our analytical framework for rating LRGs comprises six major components, including the institutional framework, economy, financial management, budgetary performance, liquidity, and debt burden.

Our assessment of the institutional framework is an important component of the rating. The institutional and legislative environment in which an LRG operates provides an important context for evaluating the LRG's individual credit profile. Therefore, we combine our assessment of the institutional framework and the five other factors listed above to determine an indicative credit level for an individual LRG. We then adjust this level for certain overriding factors to provide the final rating for the respective LRG (see "Methodology For Rating Local And Regional Governments Outside Of The U.S.," published July 15, 2019).

LRG Characteristics By Rating Category

Europe, the Middle East, and Africa (EMEA) is the only region globally where we find the full spectrum of rating categories. This is mainly due to the region's economic diversity and the different institutional frameworks, which range from extremely predictable and supportive to very volatile and underfunded, mostly in emerging markets.

We expect European LRGs' credit quality will remain resilient as the economy gradually recovers and lending rates decline from peak levels. Although stronger economic performance supports revenue growth, a rise in expenditure due to the lagged effects of inflation and rising demand for public services will dampen a stark improvement in budgetary performance. This will increase the debt burden, particularly in weaker rating categories.

Weaker institutional settings and a decline in the quality of financial management will further constrain ratings on LRGs in speculative-grade categories. The limited predictability of financial policies and the associated uncertainty can lead to higher borrowing costs, particularly in the case of entities with limited access to deep capital markets. The availability of EU funds and investor confidence are critical for their ability to maintain sufficient liquidity.

Geopolitical risks remain a key challenge to our base-case scenario and could lead to prolonged periods of slow economic growth and higher-than-expected interest rates. In such a scenario, we anticipate budgetary performance and debt levels will deteriorate across all rating categories.

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'AAA'

LRGs in the 'AAA' category are located in Germany, Norway, Sweden, and Switzerland, benefit from strong economies, and operate within institutional frameworks that are extremely predictable and supportive. All LRGs have prudent financial management practices that promote detailed long-term planning and good internal and external risk management. Most LRGs within this category enjoy very good access to external liquidity to fund any unexpected short-term financial needs. Since our previous report in September 2023, we have upgraded three Swiss LRGs to the 'AAA' category from the 'AA' category. We note that we have not downgraded any LRGs in this rating category over the same period, reflecting that our ratings on LRGs in this category are very stable.

Other common characteristics of 'AAA' rated LRGs include:

• Very strong economic base. Median national GDP per capita was high at about $55,592 in 2023, with very high local GDP per capita, particularly in Switzerland.
• Strong budgetary performance. Economic recovery will support budgetary performance over the short term. Operating surpluses will remain solid, albeit slightly lower than in 2023, due to continued spending pressures from the lagged effects of inflation and investment needs. We expect small deficits after capital accounts over 2022-2026, with a median of 0.1%.
• Low but increasing debt burden. We expect median tax-supported debt will increase to an average of 40.6% of consolidated operating revenues over 2024-2026, based on higher spending pressures. Median interest payments will be very low and stable in an international comparison and remain below 1% of operating revenues.

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'AA'

The largest number of rated LRGs in EMEA are in the 'AA' category, with 44 entities in nine European countries: Austria, the Czech Republic, France, Germany, Norway, Spain, Sweden, Switzerland, and the U.K. Most 'AA' rated LRGs operate within institutional frameworks that are very predictable and well-balanced, with the exceptions of the City of Brno in the Czech Republic, Spanish special status entities, and the French departments, which operate within evolving institutional frameworks.

Financial management practices promote detailed long-term planning and good internal and external risk management. In general, LRGs in this rating category have weaker credit profiles than their 'AAA' rated peers because of weaker institutional frameworks and higher debt burdens.

Since our previous publication, we have added three newly rated LRGs to the 'AA' category: Collectivité européenne d'Alsace, Région Provences-Alpes-Côté d'Azur, and Lancashire County Council.

Key economic and financial risk indicators for 'AA' rated LRGs comprise:

• Very strong economic base. Median national GDP per capita was about $55,592 in 2023, the same as in the 'AAA' category. Some 'AA' rated entities--such as Swiss cantons and cities, as well as Swedish municipalities and regions--benefit from very high local GDP per capita.
• Strong budgetary performance. 'AA' rated LRGs have sound operating surpluses and slightly higher deficits after capital accounts than 'AAA' rated entities.
• Moderate debt burden. We project median tax-supported debt will be at 88.3% of consolidated operating revenues over 2022-2026, which is more than double the level of 'AAA' rated LRGs. Median interest payments are low but will likely increase to an average of about 2.2% of operating revenues over 2022-2026. This is the highest level among investment-grade LRGs and a consequence of 'AA' rated LRGs' higher debt burden and their debt structure.

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'A'

LRGs in the 'A' category are located in Belgium, France, Latvia, Poland, and Spain. LRGs in this category typically operate within evolving institutional frameworks, and their financial management practices are usually strong. In general, institutional frameworks are less predictable and supportive than of those entities in the 'AA' category, and individual credit profiles are weaker due to less robust economies and higher debt burdens. Since our previous publication, we have added the newly rated Overseas Country of French Polynesia to the 'A' category.

'A' rated LRGs exhibit the following common characteristics:

• Sound economic base. Median national GDP per capita was about $32,874 in 2023.
• Solid budgetary performance, which is generally similar to that of 'AAA' and 'AA' rated peers. We expect the median operating balance will be about 6.2% of operating revenues, with moderate deficits after capital accounts of 0.9% over 2022-2026.
• Moderate indebtedness, which is higher than that of higher-rated peers. We expect median tax-supported debt will be 105.2% of consolidated operating revenues over 2022-2026, with median interest payments of about 2.0% of operating revenues over the same period.

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'BBB'

LRGs in the 'BBB' category--the lowest category within the investment-grade segment--are in Italy, Spain, Bulgaria, Croatia, and Poland. They operate within an institutional framework that, although providing generally sufficient resources to meet their responsibilities, remains subject to potential changes. Exceptions include entities in Bulgaria and the City of Zagreb in Croatia, which operate within an unbalanced institutional framework.

Italian and Spanish LRGs in the 'BBB' category benefit from a relatively sound economic base and EU grants to sustain ambitious investment programs, which will not increase deficits after capital accounts over the medium term. Spanish regions' debt burden remains relatively high, but manageable, as they benefit from access to central government-funded liquidity facilities, which cover their entire funding needs. LRGs in Eastern Europe operate in wealthy economies and have generally modest debt burdens.

'BBB' rated LRGs share the following characteristics:

• Sound economic base. Median national GDP per capita is similar to that of 'A' rated LRGs and was about $35,547 in 2023. Nevertheless, some entities' local GDP per capita ranges between 50% and 70% of the median. Examples include the City of Stara Zagora in Bulgaria, the Campania and Sicily regions in Italy, and the Autonomous Community of Extremadura in Spain.
• Modest budgetary performance. We expect median operating balances will account for an average of 3.5% of operating revenues over 2022-2026. This is half the level of 'A' rated LRGs. Conversely, median budgetary balances after capital accounts are positive, suggesting lower investments.
• Average to high debt burden below that of 'A' rated LRGs. We project median tax-supported debt will be about 54.9% of consolidated operating revenues over 2024-2026, which somewhat balances significant differences among 'BBB' rated LRGs. We note that some LRGs have significantly higher tax-supported debt burdens. This is especially the case for rated Spanish LRGs, whose debt burdens resulted from large deficits before 2014 and a gradual budgetary consolidation since. We estimate that the median interest burden will remain stable at 0.9% of operating revenues over 2022-2026.

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'BB'

We rate only two LRGs in the 'BB' category. Our rating on the Municipality of Skopje (North Macedonia) is constrained by its relatively weak institutional framework, coupled with weak financial management systems and practices, but counterbalanced by sound budgetary performance and relatively low to moderate indebtedness.

The 'BB' rated Autonomous Community of Valencia differs from other rated Spanish LRGs. Although it operates within a stronger institutional framework, we view the region's financial management as weak. Additionally, it has demonstrated weak budgetary performance and suffers from a very high debt burden, which significantly exceeds those of Spanish peers. This is partly due to below-average funding from the Spanish regional financing system for normal status regions.

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'B'

We rate the Federation of Bosnia and Herzegovina, Republika Srpska in Bosnia and Herzegovina, and the Region of Fergana in Uzbekistan in the 'B' category.

Our ratings on the Federation of Bosnia and Herzegovina and Republika Srpska are constrained by a volatile and unbalanced institutional framework that is characterized by frequent political tensions. The economy in this region is relatively poor, compared with Eastern European peers, with a median GDP per capita of $7,930 in 2023. The Federation of Bosnia and Herzegovina exhibits a stronger budgetary performance and lower debt burden than Republika Srpska.

The Region of Fergana operates within a weaker institutional framework than the entities in Bosnia and Herzegovina and is very volatile and centralized. The region's wealth remains low, with local GDP per capita of about $1,300 in 2023. While it maintains a minimal debt burden and stronger budgetary performance than Republika Srpska, Fergana's ability to influence its budgetary performance is limited due to central government control.

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'CCC'

We only rate the City of Kyiv (Ukraine) in this category. The rating is primarily based on the effects of the Russia-Ukraine war on the sovereign and the city.

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National scale ratings

Of all LRGs we rate in EMEA, we only use a national scale for LRGs in Israel. Almost all Israeli LRGs operate within evolving institutional frameworks, and their financial management practices are usually average. Israeli entities benefit from solid economic growth, with manageable liquidity levels, and share the following characteristics:

• Solid economic base, with a high national GDP per capita of about $52,341 in 2023.
• Moderate to weak budgetary performance. We expect operating margins will average 2.6% over 202-2026, with a moderate deficit after capital accounts of 2.2%.
• Low debt burden. median tax-supported debt will be about 23.9% of consolidated operating revenues over 2022-2026. Median interest payments will also be very low over the same period, at 0.8% of operating revenues. This is one of the lowest ratios among rated LRGs in EMEA.

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Related Criteria And Research

• Institutional Framework Assessments For Local And Regional Governments Outside Of The U.S., July 31, 2024
• Global LRGs Rating History List, June 17, 2024
• China Local Governments: The Slow Road To Stabilization, June 13, 2024
• U.K. Local Authorities Are Bending, But Adapting, June 06, 2024
• Mexico's New Administration Faces Old Challenges, June 3, 2024
• Your Three Minutes In Argentine Provinces: Debt Restructurings Will Likely Be Case By Case, April 30, 2024
• Your Three Minutes In Spanish Regional Finance: Higher Expenditure May Limit Deleveraging, April 24, 2024
• China LRGs: Recouping Revenue Is Key To Fiscal Sustainability, March 27, 2024
• Brazil's Fiscal Recovery Programs Support Local And Regional Governments' Finances Amid Budget Rigidities, March 14, 2024
• Paris' Lean Olympics Are Unlikely To Blow Any Budgets, March 11, 2024
• Subnational Debt 2024: Fiscal Policy Differences Influence Borrowing In Developed Markets, March 4, 2024
• Subnational Debt 2024: Focus on debt sustainability, Feb. 29, 2024
• Subnational Debt 2024: Canadian Local And Regional Governments Are Running Fast To Stay In Place , Feb. 29, 2024
• Subnational Debt 2024: Chinese Governments Reach Their Limits; Other Emerging Markets Taper Borrowing, Feb. 29, 2024
• Subnational Debt 2024: Infrastructure Spending Succumbs To Economic Slowdown, Feb. 29, 2024
• Global Ratings List: International Public Finance Entities January 2024, Jan. 18, 2024
• Methodology For Rating Local And Regional Governments Outside Of The U.S., July 15, 2019