Fitch: Lima's Recall Could Compromise Mayor's Future Projects

NEW YORK--()--We do not expect the recall referendum in Lima, Peru to impede the mayor's ambitious capital expenditure program, as most of the major programs have already been approved and financed. However, if the preliminary results of the recall referendum become definitive, it will create uncertainty, as Fuerza Social (the mayor's party) will be unlikely to retain its majority in the city council and could force the mayor compromise with other political parties to gain the approval of future policies.

A recall referendum was held in the Metropolitan Municipality of Lima on March 17. The preliminary results of the referendum confirmed Mayor Susana Villaran, with a narrow victory, but will oust 20 councilors, including 19 councilors of the mayor's left-of-center party, Fuerza Social, which can propose substitute councilors for their ousted members until elections are held in November. But these councilors will lack the political experience and knowledge of their predecessors. We expect the final outcome of the recall referendum will be confirmed by the national electoral oversight body in 30-45 days.

Lima's sharp population growth in recent years has resulted in significant traffic congestion in the city. The mayor's administration has focused its electoral mandate on improving transportation in the metropolitan area through the implementation of a number of investment projects between 2011 through 2014 estimated at PEN2.5 million (USD967,005,000), of which close to half is to be funded through borrowing, including a proposed bond issue for around PEN450 million (USD17,4060,900) expected later this year. Most of the capital expenditures projected for 2013 of around PEN700 million (USD270,761,400) have already been approved by the council, and the projected budgeted amount of approximately PEN500 million (USD193,401,000) in 2014 will be approved prior to the appointment of the new councilors, so there should be continuity in the mayor's program in investments for the municipality.

Lima accounts for about 45% of Peru's gross domestic product (GDP) and for approximately 30% of the total population of the country. The improved economic conditions have helped expand the tax base, resulting in a significant increase in municipal income.

The improving economic fundamentals of Lima, as well as dynamic tax receipts and strong operating performance, prompted Fitch to revise the city's ('BBB-') Rating Outlook to Positive from Stable last September despite the expected high level of capital expenditures to be funded to largely through borrowing.

Additional information is available on www.fitchratings.com.

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

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Fitch Ratings
Fernando Mayorga, +34 93 323 8407
Managing Director
Fitch Ratings Espana SAU
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or
Ileana Guajardo, + 52 81 8399 9113
Director
International Public Finance, Latin America
Edificio Connexity, Prol. Alfonso Reyes No. 2612
Monterrey, Mexico
or
Rob Rowan, +1 212-908-9159
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Contacts

Fitch Ratings
Fernando Mayorga, +34 93 323 8407
Managing Director
Fitch Ratings Espana SAU
Paseo de Gracia, 85
Barcelona, Spain
or
Ileana Guajardo, + 52 81 8399 9113
Director
International Public Finance, Latin America
Edificio Connexity, Prol. Alfonso Reyes No. 2612
Monterrey, Mexico
or
Rob Rowan, +1 212-908-9159
Senior Director
Fitch Wire
1 State Street Plaza
New York, NY
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com