Guidelines on Local Government Borrowing and Recent Developments in South East Europe
4. Local Government's Creditworthiness Assessment

4.3. Financial Risk1

The financial situation of a local government is crucial for its creditworthiness, as it determines the ability to meet current obligations and debt service. Factors that have an impact on the financial position of local governments include:

Economic and Social Infrastructure and socioeconomic trends underpinning the demand for public services provided by the Local Government

Per Capita Income and its volatility

Real Annual Local GDP Growth

Composition of Local GDP

Natural Resources

Employment Growth & Quality of Workforce

Municipal senior management must be well prepared to identify, evaluate and mitigate the main sources of risk for the financial situation of the local government (currency, interest rate, maturity mismatch risk). The materialization of such risks would negatively impact cash flows: consequently, municipalities may be exposed to insolvency or default scenarios.

When assessing financial risk of a local government, each of the above mentioned factors have to be compared with relevant benchmark values established for a group of similar local governments. Such an approach must be supported by adequate technical and accounting expertise as well as by the establishment of reliable local statistics database.