Bangkok--17 Dec--Standard & Poor's
RATING ACTION
On Dec. 16, 2015, Standard & Poor's Ratings Services affirmed its 'BBB-'foreign and local currency ratings on Bogota Distrito Capital (the CapitalDistrict of Bogota; Bogota or the District). At the same time, we affirmed our'BBB-' debt rating on Bogota's senior unsecured debt of Colombian pesos(COP)0.5 billion equivalent to about $300 million (at the time of the issuancein 2007), payable in foreign currency and due in 2028. The outlook remainsstable.
RATIONALE
The ratings on Bogota continue to reflect its "average" budgetary performanceas seen in the consistent generation of surpluses after debt repayment,"strong" budgetary flexibility, and "adequate" liquidity. Based on an overall"satisfactory" financial management, the ratings also reflect the District's
"moderate" debt and contingent liabilities. Limiting the ratings is the city's"weak" economy, in terms of its GDP per capita that continues to grow belowits potential, fueled in part by the slow implementation of urgent publiccapital expenditures (capex). The ratings on the District also incorporate aninstitutional framework that we assess as "evolving and unbalanced" underwhich all local and regional governments in Colombia operate.
As in previous years, Bogota continues to post surpluses after capex and debtrepayment, which reflect its effective own revenues collection policy and acontrolled expenditure structure. Contributing to these results, though, isalso the slow public infrastructure investment. Although we forecast anoperating surplus above 55% of the city's operating revenues on average for2015-2017, which would be similar to those for three previous years, we expectcapex to rise, which would result in deficits after capex of more than 15% ofits total revenues. Bogota's operating surpluses are overstated compared withthose of its international peers because its accounting standards classifyseveral operating expenditures as capex.
We expect the central government and Bogota to finance the higher capex, whichwe assume will include the investment in the city's subway first line. Weexpect the city's portion of this funding to consist of existing cash reservesand new borrowing that could increase Bogota's debt to close to 45% of its
operating revenues in 2017 from its current moderate 18%. Its debt serviceshould remain below 5% of its operating revenues. As of Sept. 30, 2015,Bogota's debt reached COP1.38 billion and could reach COP5 billion at the endof 2017. Despite this projected debt increase, we would continue to assess
Bogota's debt level as "moderate." Thus, this increase in itself wouldn't havenegative impact on ratings.
Bogota's pension system is not fully funded, but its actuarial reserves havecontinued to increase, reaching COP1.9 billion as of Sept. 30, 2015,representing 72% of its total actuarial deficit. We expect a gradual butconsistent strengthening funding of its pension system, despite ourexpectation of no additional significant reforms in the next two years.
One of the pillars of Bogota's strong budgetary performance is its effectivetax collection policy that underpins its revenues flexibility. During2012-2014, tax revenues have grown at an average of 9% annually. Along withits rising non-tax revenues, Bogota's own revenues reached a record high 76%
of its operating revenues in 2014, up from 67% in 2009. This ratio is higherthan those of most of its international peers, such as the cities of Queretaro(BBB-/Stable/--) in Mexico with 53% or Rio de Janeiro (BBB-/Stable/--) inBrazil with 64% in 2014. We estimate that the District's expenditureflexibility to be more limited over the next few years given the mountingcapex pressure and expenditures on education and health care.We continue to assess the city's financial management as "satisfactory," basedon its effective revenue and expenditure management and its prudent debt andliquidity policies.
Nevertheless, we believe that the current administration,which will end at the end of this year, was characterized by a weakimplementation capacity and weak long-term capital and financial planning thatreflected in the deterioration of the city's infrastructure. If largeinfrastructure projects continue to be delayed during the next administration,we could revise downward our assessment of the city's financial management to"weak" in the next 12-24 months.
Bogota is the main economic hub of the country, generating about 25% ofnational GDP. In recent years, its economic base has shifted towards servicesand commerce from manufacturing. In 2014, its financial and real estateactivities generated 37% of Bogota's GDP, followed by commerce, hotels, and
restaurants (17%). However, in terms of GDP per capita, the District's economycontinues to be "weak." Estimated at $12,082 in 2014, GDP per capital is lowerthan those of most of the cities with similar ratings. Bogota's GDP growth,which averaged 3.9% in 2012-2014, for the next three years could benefit fromthe likely higher public infrastructure investment.
District-owned companies, such as Empresa de Energia de Bogota S. A. E. S. P.(BBB-/Stable/--), Acueducto de Bogota S.A. ESP (not rated), and Empresa deTelecomunicaciones de Bogota S.A. (not rated), are self-supporting entities,and we don't expect them to require extraordinary support from Bogota in thenear future. Still, we assess them as a "moderate" contingent liability giventhat we believe that they may require and are likely to receive governmentsupport in case of financial stress.
According to our analysis, Bogota's institutional framework assessment scoreis '4', the same as for the rest of the local and regional governments in thecountry. This score reflects an "evolving and unbalanced" system. Thisassessment aims to capture the factors that influence all the entities
operating in the same intergovernmental system of a country.
Liquidity
Bogota's "average" budgetary performance, which incorporates its slow capexexecution for the past two years, continues to reflect in its strong cashposition and overall "adequate" liquidity. As of Sept. 30, 2015, the districtposted COP4.9 billion in cash and investments, which was equivalent to 4x its
short-term accounts payables, down from COP5.7 billion a year ago. Above 90%of this accumulated cash would be available for debt repayment and representsabout 10x its debt service in 2015. We expect a less ample liquidity positionas the capex and debt might increase in the next two years, but we expect itto remain "adequate." As part of its liquidity policy, Bogota maintains aclearly defined and prudent policy of cash investments in order to maximizereturns at low-risk levels.
OUTLOOK
The stable outlook reflects our expectation that Bogota's budgetaryperformance will remain "average" and its debt level "moderate" despite ourprojected deficits after capex in 2015-2017. We also expect the city tomaintain its liquidity position "adequate" notwithstanding the likelyreduction in its cash position.
Over the next 12-24 months, we could lower the rating if any significantchange in Bogota's fiscal policies undermines its budgetary performance beyondour projections, leading to deterioration of its liquidity position. Also, ifhe next administration were to show consistently weak political andimplementation capacity, we could revise our assessment of the city'sfinancial management, which in turn would pressure the rating.
Conversely, over the same period the sustained growth of its economy above thenational average that enables the District to continue increasing itsown-source revenues, a defined and implemented long-term capital and financialplanning, along with lower-than-expected debt levels, could result in anupgrade.