BOGOTA, Colombia--(BUSINESS WIRE)--Fitch Ratings has assigned the following initial ratings for the Municipality of Medellin, Colombia (Medellin):
--Foreign Currency Long-term 'BBB-';
--Local Currency Long-term 'BBB'.
The Rating Outlook is Stable.
The ratings of Medellin incorporate the city's relevant role in the Colombian economy, the municipality's sound fiscal policies, strong socio-economic indicators, high operating margins, significant cash flow from public sector entities, as well as the country's thorough institutional framework.
However, the ratings also incorporate low coverage of pension liabilities, higher-than-national average unemployment rates, and a prospective debt-burden which is much higher than historical levels, although manageable. The Stable Outlook reflects Medellin's ability to continue its appropriate public finance management together with the stability of common dividends transferred from Empresas Publicas de Medellin, which helps financing major investments.
Medellin has a relevant role in Colombia's economic activity, accounting for about 8% of Colombian GDP and concentrating approximately 5% of Colombian population. It is considered to be Colombia's second most important city. The municipality's high-quality infrastructure has made Medellin an important destination for investors, increasing Foreign Direct Investment (FDI) and causing tax base to increase.
Fiscal revenues have steadily risen 5% in the past four years. Tax burden in Medellin is slightly lower than other major cities in Colombia, which gives the municipality fiscal space to increase its revenues without hindering economic development nor having any other negative effects. Operating revenue is well diversified between taxes (39%), national transfers (32%) and other operating revenue (29%).
Prudent financial performance, as evidenced in stable operating expenditures, has been below the initial budget during some years. This has helped build up significant reserves. Operating margin has averaged 27% during the past five years (2010: 32.95%), and Fitch expects that margins will remain close to those in the past year.
The city's growing investment capacity has been in line to its budgetary planning, for which indebtedness has been historically moderate.
In 2010, Medellin's public debt represented about .6% of its GDP (2011f: 1.3%). As a result of aggressive investments during the next years in public transportation infrastructure, it is expected to rise to 1.9% in the next two years. The ratio of debt as a proportion of current revenue will increase to about 24% in 2012 from an actual figure of 7.4%. Due to the fact that debt in foreign currency will be larger during the next years, exchange rate hedges are in process of being implemented. However, Medellin's forecasts an increasing tax base for which such levels of debt burden are considered manageable.
None of the debt obligations from public sector entities is considered as indirect risk for the municipality.
According to the Ministry of Finance and Public Credit, Medellin's pension liabilities were COP$3.3 billion during the last year, for which only 12.7% has been funded. Even though the municipality has developed pension plans in order to mitigate this risk and has consistently funded the annual required contribution, Fitch considers that the continuation of this plan depends on the willingness of future administrations.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria' (Aug. 15, 2011);
--'International Local and Regional Governments Rating Criteria outside United States' (April 19, 2011);
--'Institutional Framework for Colombian Subnationals' (Oct. 20, 2011).
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648898
International Local and Regional Governments Rating Criteria - Outside the United States
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=611485
Institutional Framework for Colombian Subnationals
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=652809
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