Fitch affirms Metropolitan Municipality of Lima's ratings

09:11 | New York (U.S.), Jul. 11.

Fitch Ratings has affirmed Metropolitan Municipality of Lima's (MML) long-term foreign-currency issuer default rating (FC IDR) at 'BBB+', outlook stable, and its long-term local-currency issuer default rating (LC IDR) at 'A-', outlook stable.

In this sense, MML's IDRs are capped by Peru's sovereign ratings. 
"Fitch assesses the Municipality's standalone credit profile (SCP) at 'a' considering its 'aa' assessment of Debt Sustainability and its 'Midrange' Risk Profile," it said. 

Lima is the economic and political center of Peru. It has a diversified, service-sector-dominated economic base and contributes around 40% to the national GDP. Lima's population is around 9.4 million, representing 29.3% of the total population of the country. 

Key rating drivers

Revenue robustness is considered as a midrange attribute mainly due to MML's high collection rate of local taxes with adequate behavior and low volatility, as well as the counterparty rating of 'BBB+' (LC IDR 'A-') of the State of Peru, which transfers resources mostly for capex to the Municipality.

Lima's fiscal growth has been dynamic, driven by a strong national and regional economy. Two of MML's main taxes (property transfer and vehicle registration) are closely correlated to economic activities, and have an expected growth of 3%, which is close to the expected national real GDP growth of 3.5%. 

In the last three years, on average, taxes represented 51% of operating revenue. This share is expected to remain stable in the near future. Furthermost, taxes present low volatility, calculated below 5%.

Unlike other departments in Peru, Lima does not rely on central government transfers due to its stronger tax base. However, it does receive an important amount from the Nation, from the Foncomun. The counterparty (Peru) from which Lima receives this resources is rated at 'BBB+' (LC IDR 'A-'). These revenues are more volatile; however, considering all the factors, the robustness is assessed as midrange.

The attribute of revenue adjustability is considered as weaker considering that MML has no tax autonomy and midrange affordability.

"Lima has very limited power or flexibility to raise its own revenue. The bases and rates for local taxes are established and determined by the national government. The lack of flexibility makes subnationals wholly reliant on decisions made at the national level, with little accountability to the local population," Fitch said. 

It is important to highlight that even though the revenue adjustability is considered weaker, as Lima has very limited power to raise taxes, they can take other tax collection measures, and due to the strong revenue robustness, it will have an important impact in revenue. This contributes to an overall 'Midrange' risk profile.

Affordability for additional taxation is considered to be midrange. Lima's GRP per capita was used as a proxy for household income and it compares with the median of GRPs per capita of Latam. 

Editor's note: Based on information provided by Fitch Ratings.


Published: 7/11/2019
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