Fitch Ratings Upgrades Key Ratings for Cartagena, Sets Outlook at Stable

New York-based ratings agency Fitch Ratings upgraded the long-term national rating of the Cartagena to ‘AA(col)’ from ‘AA-(col)’ while affirming the short-term national rating at ‘F1+(col)’ and set the Caribbean city’s long-term rating outlook to stable from positive.

The upgrade in Cartagena’s rating is explained by results that exceeded expectations in 2023, which consolidates a structural improvement in the district’s tax collection, originated from a significant increase in these revenues in 2022.

This has led to expectations of higher operating balance sheet production in Fitch’s scenarios, resulting in a decrease in the baseline repayment ratio in the rating scenario to 1.6x from 2.5x in the last rating review, and an increase in actual debt service coverage (CRSD) to 3.7x from 2.5x.

These metrics compare favorably against peers with higher rating levels.

However, Cartagena’s ratings continue to be constrained by high levels of accounts payable and contingent obligations, as well as a long history of institutional instability.

Key Rating Factors

In addition to releasing the above statement regarding its decision to upgrade key ratings for the capital of the Colombian department of Bolívar, Fitch Ratings included the following breakdown which factors most influenced its decision.

Risk Profile: Weaker

The risk profile assessment reflects a mix of four key risk factors (KHRs) assessed at ‘Weakest’ and two at ‘Mid-Range’.

Revenue (Strength): Weakest

The assessment of this factor continues to be limited by a moderate dependence on domestic transfers from a counterparty rated ‘BB+’, despite the good performance of Cartagena’s own revenues during the historical analysis period. Between 2019 and 2023, transfers accounted for approximately 59% of operating income.

Revenue (adaptability): Weaker

For the evaluation of this factor, Fitch considers that, although there could be regulatory space to increase the rates of the main taxes, the economic capacity of taxpayers to assume such an increase would be limited. This is attributed to Colombia’s unfavorable socio-economic conditions compared to international standards. The state has socioeconomic indicators that are relatively similar to both the national average and the median of municipalities and districts rated by the agency, so local taxpayers are considered to face the same limitations.

Expenses (Sustainability): Mid-Range

The agency believes that the entity’s spending is moderately influenced by variables correlated with the economic cycle and, therefore, expects its growth to be relatively predictable in the medium term; therefore, this FCR is evaluated in ‘Mid-Range’. Its main items of operating expenditure correspond to the payment of health insurance contracts for the population of the subsidized regime and personnel expenses in the education sector. Cartagena’s operating margins have been relatively stable during 2019 to 2023, remaining between 10% and 15%.

Expenses (Adaptability): Mid-Range

The evaluation of this FCR considers that more than 10% of Cartagena’s total expenditures are allocated to capital expenditures, which could be subject to cuts in the face of financial stress. In addition, these capital expenditures are mainly financed from current balance sheet resources. The current balance over total expenditure ratio, which Fitch uses as a determinant to assess this FCR, was close to 15% during the period between 2020 and 2023.

Liabilities and Liquidity (Soundness): Weaker

The evaluation of this factor is limited by the high amount of liabilities that Cartagena presents on its balance sheet. At the end of 2023, the entity reported accounts payable for a value close to COP475,000 million, an amount much higher than the balance of financial debt of around COP70,000 million. In addition, Cartagena registers approximately COP553,000 million of estimated liabilities for litigation and lawsuits, corresponding to those processes whose probability of ruling against it is considered high. Fitch believes that this results in a high risk that liabilities will be higher than estimated in the rating scenario. However, the agency observes that the amount of accounts payable has been on a downward trend since 2021, as these exceeded COP820,000 million at the end of 2020.

Liabilities and Liquidity (Flexibility): Weaker

Fitch assesses this FCR as ‘Weaker’ due to the fact that Cartagena’s liquidity surpluses are susceptible to the level of investment execution and payment of liabilities. In this regard, the agency still considers that the bank’s structural liquidity position is limited. In addition, the international ratings of most potential liquidity providers are ‘BB+’ or lower and, as of 2024, Cartagena will not be able to use treasury loans to finance cash insufficiencies that exceed the fiscal term.