(The following statement was released by the rating agency)

Nov 29 - Fitch Ratings has assigned Estonia's City of Tallinn Long-term foreign and local currency ratings of 'A' with Stable Outlook. Fitch has also assigned Tallinn a Short-term foreign currency rating of 'F1'.

The ratings reflect the city's wealthy and diversified local economy, although it is vulnerable to the general economic climate in Europe. The ratings also take into account the city's high liquidity and good financial management, relatively low contingent liabilities and projected still moderate debt, albeit growing in the medium term.

The Stable Outlook reflects Fitch's expectations that although the city's operating margin may weaken to about 5% in 2013, following the introduction of free public transport in the city and a weaker national economic climate, the city will be able to restore it in following years, to about 7% in 2014-2015, with operating balance fully covering debt service.

The rating could be downgraded if the city's operating performance deteriorates much below Fitch's expectations, accompanied by dynamic debt growth, both leading to the operating balance being insufficient for the debt service and debt to current balance exceeding 13 years on a sustainable basis. The ratings could be upgraded if the city's operating performance strengthens, being accompanied by relatively stable direct and indirect risk in the medium term.

In 2011, the operating balance was EUR30.2m, or 7.4% of operating revenue (2010: 8.8%), covering debt service by 1.3x. The city posted a low budgetary deficit, less than 1% of total revenue. Fitch expects the city's operating margin to decline to about 5% in 2013. This is due to the negative impact that the weaker economic climate and the launch of free public transport may have on the city's revenue, which will not be fully compensated by the city's increased share of taxable income and curbed operating spending for some of the city's responsibilities.

Based on the city's prudent financial management, Fitch expects Tallinn to restore its operating performance in the following years, with operating balance by at least 1x covering debt service and the debt to current balance falling below the average debt maturity, which was estimated at about 10.5 years at end-2011.

Fitch expects the city's direct risk to rise to about EUR255m at end-2014 from EUR220m projected at end-2012, but to remain at about 55% of current revenue. The city has advanced debt management practices and Tallinn's debt repayment schedule is smooth, spread over the next 20 years. The city's debt service may average EUR27m in 2013-2014. The city's cash position has been good in 2011-2012, with more than EUR30m held in the city's accounts.

With 418,000 inhabitants, Tallinn is the economic centre of Estonia. It produced 50.9% of the national GDP in 2009 and 41% of all Estonian companies are located there. The diversified and wealthy economy results in high tax revenue for the city. However, given the country's small size in the European context, the city's economy is more vulnerable to the economic contraction. Fitch expects Estonian real GDP to grow by 3% in 2013 down from 7.6% in 2011.

(Bangalore Ratings Team, Hotline: +91 80 4135 5898, Bhanu.priya@thomsonreuters.com, Group id: BangaloreRatings@thomsonreuters.com, Reuters Messaging: Bhanu.Priya.reuters.com@reuters.net)

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