BOGOTA, Colombia--(BUSINESS WIRE)--Fitch Ratings has published a special report titled '2012 Outlook: Local Governments in Colombia'. In the report, Fitch notes the expectation for Stable Outlooks for Fitch rated Local and Regional Governments in Colombia during 2012. Overall financial strength of Local and Regional Governments (LRGs) in Colombia is solid. In 2012, budgetary and financial performance is likely to strengthen, due to various central government initiatives. Fitch expects this new legislation to both decrease direct debt as well as contingent liabilities.
The Colombian economy is expected to grow between 4.2%-5.0%, according to the central bank, and in line with Fitch's projections, supported by further Foreign Direct Investment (FDI) in oil, mining, and infrastructure sectors. Fitch expects FDI to maintain this growth given that during 2011, Colombia obtained an investment-grade rating from Fitch, and the U.S. Congress passed the Free Trade Agreement (FTA) with Colombia. These events are expected to have a positive effect on the LRGs' economic structure, by reason of improving tax collections.
The LRGs' future budget profile may be affected in the next year due to institutional modifications. With the Royalties Reform Law, income from oil and other non-renewable resources will be redistributed among non-producing subnationals, providing them with other sources for investment, thus diminishing their need for financial debt in the medium term. On the other hand, possible pension reform during second quarter 2012, led by the central government, may reduce contingent liabilities for LRGs.
Newly elected LRG administrations, taking office beginning January 2012, will take most of 2012 to prepare and present their four-year development plan for approval to local assemblies. Fitch assumes subnational investment will contract considerably compared to 2010-2011 and that borrowing will not be as dynamic as seen in previous years.
LRGs are likely to maintain operational revenues at current levels, as no significant changes are anticipated. Operating performance will almost certainly depend on control in operating expenditures, which may be altered as new administrations take office.
In 2011, LRGs reached medium-to-high leverage ratios, which are expected to remain relatively high throughout 2012, as some disbursements will take place this year and average repayment periods are seven years. Fitch believes debt levels will start to decrease in 2012 with lower investment needs. A reduction in debt, coupled with stable operating performance and more budget flexibility, will relieve debt service and debt coverage ratios.
FACTORS THAT COULD TRIGGER RATING CHANGES
Upgrade: The LRGs' capacity to outperform historical trends by enhancing their operating performance despite the challenges ahead, accompanied by stronger debt coverage and the ability to reduce debt by using other financing sources.
Downgrade: Unfavorable economic environment could be reflected in declining revenue, with a negative impact on debt service and debt coverage ratios. Growing debt or negative macroeconomic results could also affect the LRGs' outlook.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research: 2012 Outlook: Local Governments in Colombia
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=666402
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