16 October, 2024

The Outlook For Sub-Sovereign Entities Shows An Increase In Structural Budget Constraints, Accompanied By A Decrease In Support From The Central Government.

European sub-sovereign entities will encounter growing financial strains in 2023 as a result of an economic slowdown and tightened financial conditions, according to Scope Ratings. These factors will slow down tax revenue growth and prolong inflationary pressures, leading to more difficult financial conditions that will challenge investment plans and increase spending. On the other hand, supportive elements include established institutional frameworks that have demonstrated resilience during previous crises, and robust debt profiles at the regional and local levels, which will protect sub-sovereign finances from unfavorable financing conditions.

Giacomo Barisone, Head of Sovereign and Public Sector Ratings, states that reform of institutional and fiscal frameworks remains crucial, although progress has been inconsistent after consecutive crises. He adds that despite the significant development of frameworks in Europe in recent years, governments will need to find a balance between centralizing and decentralizing financial resources post-crisis in order to enhance the resilience of sub-sovereign finances to shocks and promote debt sustainability in the long term.

The impact of inflationary pressure across Europe will vary as budget structures and flexibility will determine sub-sovereign entities’ ability to cope. Some budget items are more susceptible to slowing economic growth, while others are more sensitive to inflation. Barisone states that robust debt profiles will protect many regions, municipalities, and cities from higher financing costs, while new issuance volumes are likely to be modest.

Finding the financial resources to accommodate rising interest payments could prove difficult for highly indebted sub-sovereign entities with rigid budget structures. On the other hand, improved debt profiles and moderate use of debt in view of available NGEU funds and the re-implementation of fiscal rules will support sub-sovereign debt sustainability.

Sub-sovereign entities contribute a significant portion of general government spending on climate-related issues, but multi-level government coordination of climate action remains challenging. In less advanced economies in Europe, meeting high investment needs while facing budgetary pressures, often related to the conflict in Ukraine, will be challenging, due to limited financial autonomy at the regional and local levels in much of Central and Eastern Europe. Support from international development banks remains essential in their efforts to enhance infrastructure investments and policy making.


News Team

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