Analysis of local economic conditions provides a useful framework for evaluating LGU capacity to repay debt obligations. The size, diversity and trends of the LGUs’ local economy can indicate potential future demand for LGU projects and supply of resources that can be tapped to support them. The LGUs’ infrastructure conditions can help identify opportunities or threats to economic growth. Economic diversity or lack of it can help evaluate the flexibility of the LGU borrowers’ economic base in adjusting to potentially adverse effects of business cycles.
Specifically, such economic analysis should cover an assessment of the following:
- Demographic Characteristics/Trends
- Natural Resource Endowments
- Infrastructure: availability and quality of:
- Economic Output Components
Political risk assessment aims to identify potential factors which affect the ability of the LGUs to meet their debt obligations. Positive economic performance can provide, but cannot guarantee, the necessary conditions for political stability. Disparate sectoral economic interests may diffuse LGU focus for development. Non-economic factors such as intense divisions among cultural and ethnic lines can potentially undermine the underlying stability of the LGUs’ political environment. A crucial factor in maintaining political stability for LGUs is its effectiveness in managing its affairs under a diverse political environment where multiple interested parties exist.
Administrative and Fiscal Performance
A review of the local administrative systems and fiscal performance is intended to identify innovations introduced by the local executives to manage their resources and tap external sources.
- Administrative System
- Local Government Executive Leadership
- Sources of Revenues
- Investment, Budgeting and Expenditure Policies and Practices
Financial Position and Management Policies
The financial performance is one of the key indicators of effective local governance. Ultimately, the LGUs’ financial position can reflect the area’s economic and political strengths and the LGUs’ ability to tap and manage local and external resources.
A review of the LGUs’ financial position focuses on demonstrated financial strengths as indicated in the following areas:
- Accounting Policy and Practices
- Liquidity Management
- Historical and Forecasted Project/Operating Financing Requirements
- Financial Management Efficiency Measures
- Debt Burden
- Operating Requirements