Legislative changes boost tax revenues of Istanbul, İzmir: Moody’s

“This change is credit positive for both Istanbul and İzmir because a greater share of tax revenues will improve the municipalities’ financial position,” it said in the report entitled “Legislative Changes Boost Istanbul’s and İzmir’s Tax Revenues, a Credit Positive.” 

According to pre-closing data, Istanbul’s shared tax revenues increased by 10.3 percent to 7.20 billion Turkish Liras in 2014 from 6.53 billion liras in 2013, while İzmir’s rose 17.9 percent to 2.10 billion liras from 1.78 billion liras over the same period. These increases raised Istanbul’s gross operating balances to 49 percent of operating revenue in 2014 from 43 percent in 2013, while İzmir’s improved to 42 percent from 37 percent over the same period, it said. 

“Because the reform on metropolitan municipalities and corresponding changes in the law on allocations from tax revenues went into effect in April 2014, the legislative changes will take full effect this year.

Therefore, we expect shared tax revenues to continue growing and the financial performance of Istanbul and İzmir to remain robust,” said Gjorgji Josifov, assistant vice president analyst at Moody’s.

Turkish metropolitan municipalities have largely depended on shared tax revenue growth because share taxes comprise, on average, more than 80 percent of their budgets. Around 81 percent of Istanbul’s operating revenues were derived from shared tax revenues, while in İzmir shared taxes accounted for 86 percent of operating revenues, according to the report. 

“Both municipalities have had strong financial performance in recent years, which has led to each having comfortable liquidity positions. Their accumulated cash reserves averaged 15 percent of operating revenue in 2014, creating a solid financial cushion against potential budgetary pressures and supporting capex funding over the next two years. We expect cash reserves to gradually increase toward 20 percent of their operating revenue in 2015-16 following the increase in proceeds from the shared taxes,” Josifov said. 

The decline in Istanbul’s debt stock over the past three years has resulted in a drop in debt servicing costs to 11 percent of operating revenue in 2014 from 15 percent in 2012-13, and Moody’s expects it to decline to less than 10 percent in 2015-16. 

“These positive factors mitigate Istanbul’s exposure to growing debt-servicing costs arising from a depreciating Turkish Lira, given that 94 percent of its direct debt stock is issued in foreign currency,” Moody’s said. 

Rising operating surpluses will also support İzmir’s debt-servicing capacity, although with 53 percent of its direct debt denominated in foreign currency İzmir is less vulnerable to exchange-rate fluctuations than Istanbul, according to the report.