Moody’s warns of credit weaknesses in the Municipality of Lima

Moody’s moved its rating on the Municipality of Lima from the stable tranche to negative, placing it from Baa2 to Baa3, and for its credit profilefrom Baa3 to Ba1.

Through a statement, they detail that their new outlook is explained by the sustained weakness in the municipality’s liquidity profile, which places them “in a key credit challenge.”

reasons

“The strongest operation, the balance and the treasury financing surplus recorded in 2022 did not lead to improvements in treasury holdingsraising the probability that liquidity will remain weak for longer,” they noted.

Moody’s points out that the historical volatility of cash financing surpluses is coupled with uncertainty about the ability of the mayor Rafael López Aliaga’s administration to improve its resource holdings in the next 2-3 years, “which increases the risks of liquidity”.

They remember that the cash financing deficits of previous years were met with available cash, with which the municipality avoided new debts and thus continue with its reduction plan; however, the liquidity cushion is now running out.

Could you please raise the rating? Moody’s notes that there would be an improvement in the outlook if there were cash financing surpluses greater than expected.

Finally, the rating agency recalled that Lima is exposed to environmental, social and governance risks, and its infrastructure to shocks such as heat, droughts and floods, as well as El Niño, which in the long run can affect its fiscal performance.

They also question income inequality, the prevailing informality and the demand for service improvements. These tensions “put the pace of development at risk.”

The data

pan. In 2022, the operating balance of the Municipality of Lima recovered its levels prior to the COVID-19, and registered a surplus of 19% in its total income. This contrasts with the deficits observed in 2020 and 2021 (14% and 18%, respectively).