Press Release

DBRS Morningstar Confirms the City of Madrid at A, Stable Trend

Sub-Sovereign Governments
June 16, 2023

DBRS Ratings GmbH (DBRS Morningstar) confirmed the City of Madrid’s Long-Term Foreign and Local Currency – Issuer Ratings at A. At the same time, DBRS Morningstar confirmed the City of Madrid’s Short-Term Foreign and Local Currency – Issuer Ratings at R-1 (low). The trend on all ratings is Stable.

Madrid's ratings are underpinned by (1) Spain's capital city's large and diversified economy; (2) its strong financial performance over the past decade and the city's sound medium-term fiscal outlook; and (3) the significant improvement in Madrid's debt metrics to a relatively low level and its effective public-sector debt management strategy. DBRS Morningstar also views Madrid's institutional environment positively, benefiting from a rather predictable and well-calibrated financing framework for Spanish municipalities. Madrid's ratings also benefit from DBRS Morningstar's assessment of a high likelihood of support from the Kingdom of Spain (rated "A" with a Stable trend by DBRS Morningstar). DBRS Morningstar takes the view that, despite its intrinsic strengths, the City of Madrid does not have the constitutional protection to its current revenue framework and it therefore does not qualify to be rated higher than the sovereign. Madrid's ratings are, therefore, capped by the Kingdom of Spain’s ratings.

The Stable trends reflect DBRS Morningstar's view that risks to the ratings are currently balanced. Although inflationary pressures and higher interest rates weigh on the economic outlook, the city's strong economic fundamentals and tax bases, its fiscal flexibility, and strong financial management track record offset these challenges. Thanks to its strong financial position, Madrid weathered the economic and financial impacts of the Coronavirus Disease (COVID-19) pandemic well. DBRS Morningstar will continue to monitor the pace of the economic recovery and the potential economic and budgetary consequences of the current inflationary environment.

The ratings could be upgraded if the Kingdom of Spain's ratings were upgraded.

The ratings could be downgraded if any or a combination of the following occur (1) the Kingdom of Spain's ratings were downgraded; (2) although currently unlikely given its intrinsic strengths, a structural weakening in the city's fiscal performance, leading to fiscal deficits widening and a sustained and material rise in public sector debt.


Financial Performance Deteriorated in 2022 but Madrid’s Fiscal Outlook Remains Sound

Madrid's financial performance deteriorated significantly to a deficit of 4.8% of operating revenue in 2022 from a surplus of 4.0% in 2021. The deterioration stemmed from increased expenditures because of higher inflation and a higher capital expenditure net of capital revenues of the city government. At the same time, revenues decreased as a result of a change in the calculation method for the tax on gains to municipal lands and a negative settlement from the funding system. Nevertheless, the central government would compensate in 2023 and 2024 a part of the revenue loss coming from the 2020 negative settlement, and part of the lower 2022 revenue would not be recurrent as the city returned the tax proceeds collected in the past years from taxes on gains to municipal lands, according to the new calculation method.

In national accounting standards, the financing deficit was 4.4% of operating revenue, although this was particularly affected by the central government's decision to offset the 2020 negative settlement of the funding system. The government's compensation was considered a contingent liability until its reception and therefore increased the deterioration in fiscal performance. The deterioration was widespread for large municipalities in 2022 but resulted in a modest deficit of 0.3% of operating revenue for the sector, significantly better than that of the City of Madrid. However, DBRS Morningstar believes that Madrid's ample fiscal flexibility and strong fiscal position in recent years mitigates its weaker fiscal performance. Additionally, the return to force of the Budget Stability Law (BSL) would contribute to balancing the budget given the city's firm commitment to comply with its fiscal targets.

For 2023, DBRS Morningstar continues to view the fiscal outlook for Madrid as sound. The Independent Authority for Fiscal Responsibility (AIReF) expects a fiscal improvement for 2023 with a financing surplus of 2.7% of operating revenue, based on the AIReF's April 2023 Complementary Report of Individual Valuation. The report estimates fiscal performance for the major local entities, projecting that Madrid's fiscal surplus could improve in 2023 and reach EUR 146 million versus EUR 71 million in 2021 under national accounting standards. The report also explained that, if the negative settlement in 2020 were excluded from national accounting, the city would have recorded a surplus. The overall effect of this adjustment within the sector is equivalent to EUR 1,000 million. Going forward, maintaining a sound fiscal performance will remain a key feature for the city's credit profile. In particular, containing structural expenditure growth in the context of continued inflation and heightened pressure on civil servants’ wages will remain important for the city to maintain strong financial results. Despite some countercyclical tax cuts that Madrid implemented and the pickup in capital expenditure (capex), DBRS Morningstar expects that the city's government will remain committed to sound fiscal performance over the medium term. In addition, DBRS Morningstar highlights that Madrid benefits from fiscal headroom and fiscal flexibility, which would allow the city to significantly increase its tax receipts by raising local tax rates if needed and decided by the local government.

In terms of overall governance, DBRS Morningstar views the city's timely and strong degree of transparency, high level of overall financial disclosure, and budgetary monitoring positively. Madrid's budgetary process is sound and includes some multiannual projections. Following the municipal elections in May 2023, DBRS Morningstar takes the view that the re-election of the Mayor José Luis Martinez-Almeida should support policy continuity, including fiscal strategy (please see: Madrid: Local and Regional Elections Point to Policy Continuity Re-Election of Madrid's Regional President and City Mayor,

Madrid’s Debt Sustainability is Very Strong, Supported by Diversification and Prudent Debt and Liquidity Management

The city’s debt has decreased rapidly over the last decade, with a more than fourfold decline in Madrid's debt stock to EUR 1.7 billion from EUR 7.7 billion between 2012 and 2022, with a marked improvement until 2018 and a slower but constant decrease in recent years. By contrast, during 2022, the city recorded a deficit that produced a moderate debt increase of EUR 45 million; however, the increased debt is not material and the city's debt level remains moderately low. With a debt ratio of 41% of operating revenues at the end of 2022, Madrid’s debt remains substantially below the 75% limit set in the national government's Budgetary Law; surpassing this limit would prompt rebalancing measures to bring down local debt. In recent years, the city’s debt sustainability has significantly strengthened, reflecting a relatively low debt stock, wide economic and tax bases, and strong access to diversified financing sources.

Unlike the vast majority of other local governments in Spain, the city has also maintained a large share of its debt in the form of bond issuances. At the end of 2022, Madrid’s EUR 300 million bond issuances represented 17% of its EUR 1.7 billion debt stock and around 80% of the total bonds outstanding for all Spanish local governments (excluding Spanish regions). However, the city is facing some difficulties in maintaining access as a result of the low volume of bonds that reduces its presence compared with other subsovereign governments that have more debt issuances. In addition, the municipality maintained its debt-reduction trend from previous years, which also reduced financing needs and therefore the potential bond size, reducing market appetite.

Madrid's liquidity is deemed strong, reflecting the cash buffer that more than covers the city's debt redemptions over the next five years as well as its access to credit line facilities. DBRS Morningstar is confident that the city can meet its financing requirements, given its strong liquidity position and ultimately the backstop financing support from the national government. Moreover, the 2022 funds for local entities included EUR1,076 million designated to assist municipalities recurrently surpassing the average suppliers' payment target of 60 days (Madrid recorded 15 days at the end of 2022). However, in 2022, the national government reduced the available backstop financing support to EUR 1,350 million as the municipal sector's financial needs reduced from EUR 10,850 million in 2012.

The Economic Recovery is Under Way but Uncertainties Remain Given Inflationary Pressures and Elevated Interest Rates

Madrid is the capital of and the most populated city in Spain, with a population of approximately 3.3 million inhabitants and a GDP estimated at around EUR 169 billion at the end of 2022. The city is located in the Autonomous Community of Madrid (rated "A" with a Stable trend by DBRS Morningstar), which benefits from the largest regional economy in Spain representing close to 20% of Spain’s GDP. Despite some economic differences with the Autonomous Community of Madrid, the city's economy represents a substantial share of the region, and is affected by the national economic context.

In 2020, given the coronavirus pandemic, Madrid's GDP declined by a significant 11.0%, in line with Spain's GDP decline of 11.3%. In 2021, Madrid's GDP rebounded by 5.4%, slightly lower than the 5.5% for Spain's output, as a result of the lower drop in 2020. From a sectoral perspective, the recovery has been especially strong in the construction (+10.1%) and services (+6.9%) sectors, with the latter benefitting from a strong performance from the commerce, hospitality, and transport sectors according to the region's statistics agency (17.5% recovery after a 21.4% drop in 2020).

The regional economy is expected to continue recovering in coming years, broadly in line with the national average. DBRS Morningstar expects continued strong tourism performance and robust job market performance to support Spain's GDP, but inflationary pressures, increasing financing costs, and a weaker external backdrop will likely weigh on growth in 2023. The European Commission (EC) revised its growth projections for Spain upwards to 1.9% in 2023 and forecast 2.0% growth for 2024 in its Spring 2023 economic forecast compared with 1.4% for 2023.

These forecasts remain clouded by inflation and tightening monetary policy, leading to a reduction in consumption and investment. On the other hand, the implementation of Next Generation EU (NGEU) investments should partially mitigate these reductions. In addition, the energy price hikes seem to have eased, which should help mitigate the impact of inflation in the economy even though core inflation remains elevated. The persistence of high inflation increases second hand effects on employee compensation and business margins.

The financial resources expected from the NGEU, including the Recovery and Resilience Facility (RRF) and REACT-EU funds, should continue to alleviate any potential long-term impact from the pandemic and support Madrid's recovery. The region estimates revenue related to these funds at around EUR 1 billion in 2022, with EUR 0.9 billion utilised. Going forward, the impact of higher inflation on consumption and investment as well as the speed of EU funds absorption of will remain key areas of focus for DBRS Morningstar to assess the strength of the recovery within the region.


Social (S) Factors

The Passed-through Social credit considerations have a relevant effect on the ratings, as the social factors affecting the Kingdom of Spain’s ratings are passed-through to City of Madrid.

There were no Environmental or Governance factors that had a significant or relevant effect on the credit analysis

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at (May 17, 2022)


DBRS Morningstar European Sub-Sovereign Governments Scorecard generates a result in the AA (high) – AA (low) range. Additional considerations factored into the Rating Committee decision included DBRS Morningstar’s view that the City of Madrid does not have the constitutional protection to be rated above the sovereign rating.

The main points discussed during the Rating Committee included DBRS Morningstar’s view that the City of Madrid’s result on recent elections points to fiscal policy continuity the city’s economic growth prospects and the impact of the inflationary environment, Madrid’s public finances, the city’s debt and liquidity profile, the likelihood of support from the national government, if ever needed. In addition the Rating Committee considered the likely increase in the debt position of the city in the next two to three years, the remaining macroeconomic uncertainties and the risks to the fiscal outlook.

For more information on the Key Indicators used for the Kingdom of Spain, please see the Sovereign Scorecard Indicators and Building Block Assessments:

The national scorecard indicators were used for the sovereign rating. The Kingdom of Spain’s rating was an input to the credit analysis of the City of Madrid.

On 21 June 2023, DBRS Morningstar amended the above press release to correct the percentage GDP growth of Madrid in 2020 and 2021 on the ninth paragraph of the rating rationale.

All figures are in EUR unless otherwise noted.

The principal methodology is the Rating European Sub-Sovereign Governments (August 12, 2022) In addition DBRS Morningstar uses the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings in its consideration of ESG factors.

The credit rating methodologies used in the analysis of this transaction can be found at:

The sources of information used for this rating include the City of Madrid for financial position for the 2015-22 period (annual accounts for the 2015-22 period), annual budgetary execution documents for 2022, and debt structure documentation for the 2016-22 period, Bank of Spain for the debt stock during the period between 2015 and 2022 (Debt according to the excessive deficit procedure documents), Independent Authority for Fiscal Responsibility (AIReF) for its estimate of the 2023 local governments’ budgetary performance (Informe complementario de evaluación individual sobre la ejecución presupuestaria, deuda pública y regla de gasto 2023 de la corporaciones locales, October 2023) and its Supplementary Individual Assessment Report on the 2023 Budgets of Local Governments (April, 2023), Instituto Nacional de Estadística (INE), Ministry of Finance; the Spring 2023 economic forecast from the European Commission, 2020 European Social Progress Index, Haver Analytics. DBRS Morningstar considers the information available to it for the purposes of providing this rating to be of satisfactory quality.

DBRS Morningstar does not audit the information it receives in connection with the rating process, and it does not and cannot independently verify that information in every instance.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar’s outlooks and ratings are under regular surveillance.

For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: For further information on DBRS Morningstar historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see

The sensitivity analysis of the relevant key rating assumptions can be found at:

This rating is endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Jorge Espinosa, Assistant Vice President, Global Sovereign Ratings
Rating Committee Chair: Thomas R. Torgerson, Managing Director, Co-Head Global Sovereign Ratings
Initial Rating Date: April 22, 2022
Last Rating Date: February 24, 2023

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