With national financial support decreasing and competition in the municipal bonds market intensifying, local governments are trying to enhance their creditworthiness.
“We will strive to secure the soundness of our finances and raise funds based on the principle of self-responsibility,” Yokohama Mayor Hiroshi Nakata said at a briefing in Tokyo in early March.
The session was aimed at briefing investors about the reliability of municipal bonds and the city’s financial vision.
“We are in an era when issue terms of municipal bonds are determined depending on local governments’ management of public finances,” Nataka said.
Bonds issued by the Yokohama Municipal Government are regarded as blue-chip, on par with those issued by the Tokyo Metropolitan Government.
Nevertheless, Yokohama is increasing dialogue with the market about its bonds.
“We intend to enhance the image of our bonds so that they will remain competitive even when various financial products are launched in line with the recovery of the economy,” said Ryosuke Kaido, a Yokohama official in charge of public finance.
This is because credit-rating agencies have become more strict in rating the creditworthiness of local governments.
For instance, the Japan Credit Rating Agency in January downgraded the rating of the bonds issued by the Osaka Prefectural Government, the Kyoto Municipal Government and the Osaka Municipal Government from double A to double A minus.
Rating and Investment Information left the rating of Osaka Prefectural Government bonds unchanged at double A minus, the lowest rating among the 28 local governments that publicly issue bonds.
The Osaka Prefectural Government is plagued with outstanding obligations of more than 4 trillion yen.
Other local governments rated low are also financially strapped due to deficit-ridden public enterprises they operate.
The severe rating of local governments by the rating agencies reflects harsh national fiscal conditions.
The long-term debts of the central and local governments combined are expected to have swelled to an unprecedented level of 719 trillion yen by the end of the current fiscal year. The national government, therefore, has begun to reduce its involvement in local public finances.
As a result of fiscal investment and loan program reforms, the ratio between public and private funds in municipal bond underwriting in fiscal 2004 is expected to come to 40 percent to 60 percent, with private funds exceeding public funds for the first time.
This indicates local governments cannot carry out various projects without raising funds from the private sector.
But they are finding it increasingly difficult to raise funds through issuance of privately placed bonds, as regional banks, the main underwriters of such bonds, have become selective.
With the honeymoon with regional banks coming to an end, “we have to change ourselves from a local government being supported by financial institutions to a local government in which regional banks want to invest,” said Akira Ito, the mayor of Kitakami, Iwate Prefecture.
Kitakami officials are diligently visiting local businesses to listen to their problems, with the aim of becoming a “caring city” and thus expanding possible future independent revenue sources.
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