Rating Action: Moody's changes Lima's outlook to negative from stable; affirms Baa2 ratingGlobal Credit Research - 01 Sep 2022New York, September 01, 2022 -- Moody's Investors Service ("Moody's") has today affirmed Municipality of Lima's ("Lima") issuer rating of Baa2 and its Baseline Credit Assessment (BCA) of baa3. The outlook changed to negative from stable.RATINGS RATIONALERATIONALE FOR THE OUTLOOK CHANGE TO NEGATIVE FROM STABLEThe outlook change to negative from stable for the Municipality of Lima reflects Moody's expectation that Lima will continue registering cash financing deficits during 2022 and 2023, restricting liquidity metrics to below 1.0x cash to current liabilities which is a lower level than investment grade regional peers.During 2021, Lima increased its capital investments by 84% in order to boost the economy after the coronavirus pandemic. However, this increase led to a cash financing deficit of 17.6% of total revenue, which was fully funded through available cash. Consequently, Lima's liquidity position decreased to 0.7x cash to current liabilities as of December 2021 from 1.4x registered in 2020.Under Lima's current plan for 2022 and 2023, the municipality envisages to continue developing its investment plan which, according to Moody's expectations, will lead to cash financing deficits of around 20% of total revenue on average. Lima is planning to finance the deficits trough additional debt. This will increase net direct and indirect debt to 73% of operating revenue by 2023, and while it should also limit any further drawdowns from cash, does not provide for an improvement in liquidity. Moody's will monitor and further assess the effectiveness of management's future policy responses and efforts to return towards stronger liquidity metrics in the next 12-18 months.RATINGS RATIONALE FOR THE RATINGS' AFFIRMATIONThe affirmation of the baa3 BCA and Baa2 issuer rating reflects the municipality's economic strength, strong own-source revenue levels and positive gross operating balances (GOBs).As Peru's main city in terms of population and economic contribution, Lima is expected to continue to benefit from the ongoing economic recovery in 2022 and 2023 with real GDP growth rates of around 2.5% to 3% each year. As a result, Moody's expects Lima will continue registering strong own-source revenues, accounting for 82% of operating revenue. This will allow Lima to post strong positive GOBs of 17%, one of its main credit strengths, in order to partially fund its investment plan. However, Moody's forecasts that Lima's GOBs in 2022 and 2023 will be less than those recorded before the coronavirus pandemic (27.6% of operating revenue, on average, during 2018 and 2019), reflecting the higher anticipated operating expenditures due to inflation and higher interest payments per the increasing rates.Lima's Baa2 rating reflects a Baseline Credit Assessment (BCA) of baa3 along with an assumption of a strong level of extraordinary support from the Government of Peru (Baa1 stable).ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONSLima's ESG Credit Impact Score is moderately negative (CIS-3), reflecting its moderately negative exposure to social risks, and highly negative environmental and governance risks.Lima's infrastructure is exposed to heat stress, droughts, floods and to El Nino weather phenomenon. The damaging effects of these climate shocks have had a negative impact on fiscal performance when replacing damaged infrastructure and providing relief to the affected areas.While social risks have not led to any instability that has adversely affected Lima's economic or fiscal performance over the past 15 years, low income levels, a large informal economy, income inequality, and relatively low quality basic services including sanitation, health and education generate latent moderately negative risks.Lima has a highly negative exposure to governance risks as it displays weak transparency and disclosure practices as the municipality delivers information with certain delays. Lima also registers volatile financial results and higher debt levels than other peers, with low exposure to interest rate and foreign exchange risks.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSThe outlook could be stabilized if the municipality records stronger-than-expected gross operating balances, leading to lower cash financing deficits and sustaining cash to current liabilities above 1.0x liquidity.If Lima records weaker than forecasted gross operating balances, and is unable to demonstrate an improvement in liquidity levels, the rating would face downward pressure. A downgrade of the Government of Peru's (Baa1 stable) rating could also translate into a downgrade of Lima's rating.The principal methodology used in these ratings was Regional and Local Governments published in January 2018 and available at https://ratings.moodys.com/api/rmc-documents/66129. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of this methodology.REGULATORY DISCLOSURESFor further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found on https://ratings.moodys.com/rating-definitions.For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. 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Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website https://ratings.moodys.com.Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://ratings.moodys.com/documents/PBC_1288235.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on https://ratings.moodys.com.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on https://ratings.moodys.com.Please see https://ratings.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.Please see the issuer/deal page on https://ratings.moodys.com for additional regulatory disclosures for each credit rating. Roxana Munoz Asst Vice President - Analyst Sub-Sovereign Group Moody's de Mexico S.A. de C.V Ave. Paseo de las Palmas No. 405 - 502 Col. 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