Fitch Ratings has upgraded the long-term Issuer Default Rating (IDR) of the Metropolitan Municipality of Lima to 'BBB+' from 'BBB-‘, citing its strong fiscal position and high operating margins which are expected to result in manageable debt metrics.
In its report released Wednesday, the London-based agency revised the outlook on the credit rating of the Peruvian capital to stable from positive.
"The MML has a key economic importance for its high and dynamic collection of municipal taxes, which supports high-margin operations," Fitch said in an statement.
Likewise, Fitch hails MML’s budgetary performance which has registered strong operating margins, averaging 46 percent in the period of 2009-2013 and its higher socio-economic standards than the of rest of Peru.
In addition, Fitch has upgraded the long-term local currency IDR of the MML to 'BBB+' from 'BBB- as the Metropolitan Area of Lima's Mayorship provides 45 of Peru's gross domestic product (GDP).
The upgrade is accordance with the same action taken by Fitch on Peru's sovereign rating in October 2013 [Long-term foreign IDR 'BBB+'/Long-term local currency IDR 'A-'].
Nevertheless, the ratings also factor in MML's significant investment plans, a substantial portion of which is expected to be debt funded and which will add pressure to current expenditures.
An increasing tax base generated by population growth and the implementation of new fiscal policies have led to a significant increase in municipal income with property transfer taxes (alcabala) accounting for a large percentage of the income growth.
Furthermore, an important factor in increased revenue generation has been the efforts by the administration to reduce and collect tax arrears.
In addition to taxes, historically MML also collected toll road payments, but in 2013 this revenue source was transferred to new concessionaries that are responsible for the roads' maintenance and operations.
This represents a significant reduction in revenues going forward; toll receipts represented around 24% of adjusted operating revenues excluding the property transfer tax collected on behalf of the districts in 2012.
MML's responsibilities are largely focused on capital expenditure. Given the strong demographic growth, capital expenditure has been significant, particularly in the past fiscal years.
In this regard, Fitch noted there will be an increase in operating expenditure from the planned capital expenditure undertaken, while the agency's base case scenario still projects comfortable operating margins, between 25-30% in the next three years.
For the future, the investment plan includes a large number of projects such as improving and expanding the main public transport routes, parks, hills and neighborhoods, some roads, the project of the coastal zone (Costa Verde), and the large wholesale market (EMMSA), among others.
According to its statement, Fitch finds that regarding debt, MML registers PEN558 million (USD199.7 million), as of March 30, 2014. To partially fund capital expenditure, debt rose.
Debt as a proportion of current revenue is estimated to increase from 22% (2012) to a maximum of 50% by end-2014. This level of debt is manageable particularly with the high operating margins.
(END) INT/LOG
Published: 7/23/2014