Moody’s Investors Service has affirmed the Baa2 issuer (local currency) and debt ratings (foreign currency) of Bogota, and also the Baa2 issuer ratings (foreign and local currency) of the City of Medellin; Colombia’s two largest cities, however the outlook for both cities was changed to stable from negative. The baseline credit assessments for both cities were also affirmed at baa2.
Moody’s states that its action was prompted by the ratings firm’s affirmation of the Government of Colombia’s Baa2 rating and the revision of its outlook to stable from negative. For full details please refer to the sovereign press release.
The affirmation of the baa2 baseline credit assessment (BCA) and Baa2 ratings of the cities of Bogota and Medellin reflects their relatively strong operating performance and indicators of financial health including high levels of own-source revenues, stemming from their sizable economies, relatively low to moderate debt levels and manageable cash financing requirements that have been driven primarily by infrastructure spending. Additionally, both have historically maintained strong governance and management practices.
Bogotá, which contributes 25.7% of Colombia’s GDP and Medellin, Antioquia, which contributes 13.9% of national GDP are the two main cities and economic centers in Colombia. Given Moody’s expectation of an improvement in Colombia’s GDP growth, local GDP will recover leading to a higher growth of own-source revenues allowing both cities to fund part of their infrastructure plans internally. In 2018, own-source revenues represented 58% of total revenues for Bogotá and 39.2% for Medellin, a relatively high share compared to regional peers, with these levels expected to continue in 2019 and 2020.
Between 2014-2018, Bogota’s cash financing deficits averaged 4.7% of total revenues and net direct and indirect debt averaged 11.1% of total revenues. Bogotá registered a low cash financing deficit of 2.8% of total revenues in 2018, and Moody’s expects that the city’s deficit will rise to approximately 3% in 2019 and to almost 11% in 2020 should the planned levels of spending in transportation projects, mainly related to the city’s subway system, be fulfilled. Debt levels will increase as a result but will remain at moderate levels equal to approximately 25% of total revenues.
Medellin’s cash financing requirements over the 2014-2018 period averaged 2.7% of total revenues and debt levels averaged 27.5% of total revenues. Moody’s estimates that Medellin posted a cash financing deficit of 10.7% of total revenues in 2018 and that in 2019 this metric will improve to a deficit of 3%. As a result, debt levels increased to 34.1% of total revenues at the end of 2018, compared to 26% in 2017.
Both Bogotá and Medellin have a BCA of baa2, which reflects the credit qualities described above. The Baa2 ratings also incorporate Moody’s assumption of strong extraordinary support coming from the Government of Colombia (Baa2 stable).
Rationale for the stable outlook
The stable outlooks for both Bogotá and Medellin reflect Moody’s expectation that sound financial and liquidity metrics for both cities will continue in the near to medium term. This is also backed by strong governance and management practices that, despite their aggressive infrastructure programs, will ensure increases to debt burdens will remain manageable.
Factors that could change the ratings
Given that Bogotá is rated at the same level as the Government of Colombia (Baa2 stable), an upgrade of Colombia’s rating along with the maintenance of high liquidity levels and moderate debt levels, could trigger upward pressure to Bogotá’s rating. Conversely, a downgrade to Colombia’s Baa2 rating or a material increase in financial deficits along with aggressive debt increases and a sharp deterioration of liquidity, could exert downward pressure to the rating.
Given that Medellin is rated at the same level as the Government of Colombia (Baa2 stable), an upgrade of Colombia’s rating along with stronger liquidity and moderate debt levels, could trigger upward pressure to Medellin’s rating. Conversely, a downgrade to Colombia’s Baa2 rating or the loss of fiscal discipline leading to financial deficits, debt increases above our expectations and a deterioration of liquidity, could exert downward pressure to the rating.
The principal methodology used in these ratings was Moody’s Regional and Local Governments published in January 2018.