S&P Global Ratings assigns credit ratings to local and regional governments (LRGs) based on its qualitative and quantitative analysis of a range of financial, economic, managerial, and institutional factors. Our analytical framework for rating LRGs is articulated around six major components, resulting from our methodology:

• The institutional framework;
• Economy;
• Financial management;
• Budgetary performance;
• Liquidity; and
• Debt burden.

Our assessment of the institutional framework is an important component of the rating. The institutional and legislative environment in which an LRG operates provides an important context in which to evaluate the LRG's individual credit profile. Therefore, we combine our assessment of the institutional framework and the five other factors listed above to determine an indicative credit level for an individual LRG. We then adjust this level for certain overriding factors to provide the final rating for the respective LRG (see "Methodology For Rating Local And Regional Governments Outside Of The U.S." published July 15, 2019).

LRG Characteristics By Rating Category

There is rising downward pressure in the Asia-Pacific region in 2023. We have lowered the ratings on two New Zealand local councils and one Australian territory so far; five other New Zealand local councils are currently on negative outlooks.

Elevated inflation has boosted operating revenues since last year but has also contributed to fast rising operating spending in the form of wage increases, utilities costs, and rising costs associated with capital spending. Many LRGs in Asia-Pacific have ambitious infrastructure programs. This is particularly acute in New Zealand, where ratings are under pressure because of weak budgetary metrics, which are leading to higher debt and weaker liquidity. In addition, higher interest rates are set to add to growing interest bills of LRGs.

We note that despite most LRGs seeing economic recoveries post-pandemic, some LRGs will continue to have weaker budgetary performance compared to pre-pandemic levels. Many have debt burdens that will remain higher than before the pandemic for years. This is most evident at the LRGs that pursued, and continue to pursue, capital spending in response to the economic contraction caused by the pandemic. Contrary to past crises, in some jurisdictions, LRGs took on greater responsibility for providing economic stimulus packages. As the economic recovery normalized, LRGs have faced the need to address infrastructure development for incoming migration. This mostly affected LRGs in Australia and has left them structurally weaker. Many have higher debt levels, and some lower ratings. Their debt ratios will only recover slowly over the next few years, if at all.

We expect many ratings on Asia-Pacific LRGs have proven to be relatively resilient to periods of stress. Our five-year forecasts for balance after-capital accounts as a percentage of total revenue and tax-supported debt as a percentage of consolidated operating revenue have changed little since 2020 within their respective rating categories, reflecting our view that the effects from the volatile global environment will remain manageable. While LRGs also face domestic issues such as inflationary pressures, higher funding costs, and vulnerable property markets, we expect the recovery to gain momentum as both global and domestic uncertainties subside.

In addition to the LRGs listed in this report, S&P Global Ratings also monitors Chinese LRG entities with sizeable debt stock. We view uneven creditworthiness based on their economic resilience, location, and fiscal buffer, regardless of LRGs' operations in a centralized institutional framework. The credit metrics of tier-one (or provincial) governments (as the only eligible issuers in the respective regions, who will onlend to lower tiers) are likely to stay modest, in line with China's measured economic recovery and gradual phaseout of outsized infrastructure spending (see "China Tier-One Local Government Risk Indicators Chartbook," July 23, 2023; and "China Tier-One Local Government Risk Indicators Databook," July 23, 2023).

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'AAA'

The State of Western Australia is the only rated LRGs in the 'AAA' rating category in Asia-Pacific. The Australia-based entity operates in an extremely predictable and supportive institutional framework. Its financial management practices are very good, as demonstrated by detailed long-term planning, and good internal and external risk management, particularly in its treasury functions. Western Australia has a strong, and wealthy economy. That said, its economy is concentrated in mining and related construction.

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'AA'

LRGs in the 'AA' rating category form the biggest group in Asia-Pacific, comprising 23 councils in New Zealand, six Australian states, and the Seoul Metropolitan Government (SMG) of Korea. The composition has remained relatively stable compared to our previous publication. The Australian Capital Territory has joined the category after we lowered the rating from 'AAA' in September 2023. Further, we lowered the ratings on three New Zealand councils within the 'AA' rating category since the previous publication.

The Australian states and New Zealand LRGs operate in an extremely predictable and well-balanced institutional framework that supports their strong financial management. SMG is an exception in this category, since we view Korea's intergovernmental system to be more driven by central government decisions, and the local governments has less veto power against the central government. We classify the institutional framework in which it operates as very predictable and well-balanced. As the economic center of Korea, SMG more than offsets this weakness by demonstrating stronger economic and financial profiles than its peers in the same rating category. In addition, the rating on SMG is capped by the Korea sovereign rating.

In general, LRGs in this rating category have weaker credit profiles than their 'AAA' rated peers because of either or both of the following: wider or more-volatile budget deficits; or higher debt burdens. Another differentiating factor is financial management practices, which we view as strong, but not as profound as those in the 'AAA' category.

Key economic and financial risk indicators that we observe for 'AA' rated LRGs are:

• High national GDP per capita, with a median level of about US$53,730. Their economies demonstrate a weaker socioeconomic profile compared with higher rated LRGs, particularly New Zealand local councils.
• Moderate budgetary performance with strong operating margins but widening after-capital account deficits that vary in line with investment plans of the LRGs. We usually see larger deficits at New Zealand councils than at SMG as they have many infrastructure responsibilities, as a proportion of their balance sheets among global peers. Meanwhile, after-capital account deficits at Australian LRGs are elevated because their operating balances have yet to fully recover from the impact of the pandemic while conducting very large road construction and public transport initiatives. Median after-capital account deficit is about 12.5% on average over 2021-2025, which is higher compared to all other rating categories.
• High and increasing debt burden. We forecast that median tax-supported debt as a percentage of consolidated operating revenue will reach 182.5% by 2025 from 146.5% in 2022. We also project the median interest payment as a percentage of operating revenue will rise gradually to 6.8% by 2025 from 4.1% in 2022, as debt and interest costs increase. Median indebtedness of 'AA' rated LRGs will be considerably higher in 2025 than their 'AAA' as well as most of 'A' rated peers.
• SMG is an exceptional LRG in this context; we still expect it to record marginal budget surpluses. Its debt level, albeit rising slowly, is the lowest of all rated LRGs in Asia-Pacific. SMG was able to maintain overall fiscal surplus positions and keep debt levels low even during the COVID years due to prudential fiscal management.

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'A'

The LRGs in the 'A' rating category are in New Zealand, Japan, and Malaysia. The institutional frameworks of these LRGs vary, and while they are considerably more indebted than LRGs in higher rating categories, it is difficult to derive common characteristics between these LRGs by looking at the medians.

'A' rated LRGs in their country of domicile exhibit the following characteristics:

• The 'A+' ratings on two New Zealand councils reflect their weaker economic profiles, wider budget deficits, higher debt burdens, and weaker liquidity assessments than 'AA' rated domestic peers, even though they benefit from a very predictable and well-balanced institutional framework. Weaker financial metrics stem from their proportionally higher capital spending.
• Japanese LRGs in this rating category are economic centers and thus the GDP per capita in these regions exceed the national average. Fiscal consolidation efforts and high revenue collection will leave their operating margins high throughout the forecast horizon. At the same time, we project balance after capital accounts to show a slight surplus, on average, helping debt burdens to decrease as it did in the years prior to the pandemic. Nevertheless, the sovereign rating on Japan constrains the ratings on these LRGs. We anticipate that their financial profiles and debt servicing capacities would come under extreme pressure in the event of a sovereign default.
• The rating on Sarawak reflects a blend of stronger and weaker scores compared with peers. Although Sarawak's GDP per capita is higher than domestic peers', the state also faces concentration risk in the oil and gas sector. Despite ongoing investments in infrastructure, we project its tax-supported debt burden to decrease. These weaknesses are more than offset by the state's large operating surpluses. Sarawak achieves these surpluses by being one of the few LRGs in Asia-Pacific where high commodity prices and depreciation of the domestic currency both support its revenue.

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'BBB'

We currently do not rate any LRG in this category in Asia-Pacific.

'BB'

The Indian state of Kerala is the only LRG we rate in this category in Asia-Pacific. Indian states operate within an evolving and unbalanced institutional framework. Our rating on Kerala is constrained because its weak capacity to raise revenue to fund its spending needs results in a poorly balanced budget and a mounting debt burden. It is also less likely to receive systemic support from the central government. However, liquidity support from the central bank, the Reserve Bank of India (RBI), is strong. The RBI arranges bond auctions on behalf of the states to secure external funding, and provides short-term liquidity support to states through advances, overdrafts, and liquidity lines. We expect the states will need some years to restore their budgets from the damage caused by the pandemic and the faster pace of economic recovery will accelerate their progress.

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'B' and lower

We do not rate any LRG in this category in Asia-Pacific.