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Moody's: Impact of Sovereign Upgrades Diverge for Colombian and Mexican Sub-Sovereigns Ratings

August 24, 2014

Credit divergence between the Colombian and Mexican sub-sovereigns shows that improved credit quality of a sovereign

government does not necessarily translate to better credit quality of

lower-tier governments says Moody's in a new report entitled,

"Sub-Sovereign Not Always Boosted By Sovereign Upgrades: Contrasting

Bogota and Medellin with Mexican Sub-Sovereigns"

Mexican sub-sovereigns received no rating uplift following Moody's

upgrade of Mexico to A3, while Bogota and Medellin received a matching

upgrade when Moody's raised the sovereign rating of Colombia to Baa2.

"Mexican sub-sovereigns' ratings were not raised because their track

record of weak financial management negated the sovereign's improved

credit profile. In contrast, the fiscally prudent cities of Bogota and

Medellin received a matching upgrade to Baa2", says Maria del Carmen

Martinez-Richa, MoodyÂīs Assistant Vice-President and author of the report.

The report mentions that the Colombia's tight oversight of sub-sovereigns

has strengthened governance and financial management practices. In

Mexico oversight is less rigorous and has allowed weak financial

management practices to persist.

"Bogota and Medellin benefit directly from Colombia's strong economic

environment reporting a compound annual growth rate for their own-source

revenues of 8.9% and 6.3% respectively, between 2008 and 2012." Added

Martinez-Richa. Bogota and Medellin's credit profiles are solid with

their ratings capped by the Baa2 sovereign's rating. In contrast,

Mexican sub-sovereigns fiscal positions have deteriorated despite the

support of higher federal transfers. Mexican RLGs standalone credit

profiles are not strong enough to match Mexico's A3 sovereign rating,

says Moody's.

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Source: EMBIN (Emerging Markets Business Information News)

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