Hardvard

Credit Opinion: Sinaloa, State of Global Credit Research - 03 Jun 2011
Mexico

Ratings Category
Outlook NSR Issuer Rating -Dom Curr Issuer Rating -Dom Curr

Moody's Rating
Stable A2.mx Ba2

Contacts Analyst
Maria del Carmen Martinez-Richa/Mexico Rodolfo Torres/Mexico David Rubinoff/London

Phone
52.55.1253.5700 44.20.7772.5454

Key Indicators Sinaloa, State of (Year ending 12/31)Net Direct and Indirect Debt/Total Revenue (%) Interest Payments/Total Revenue (%) Debt Service/Total Revenue (%) Cash Financing Surplus (Requirement)/Total Revenue (%) Capital Expenditures/Total Expenditures (%) Discretionary Own Source Revenue/Total Revenue (%) GDP per capita as % of the National Average

2005 18.6 1.2 1.2 0.2 10.7 7.9 79.7

2006 16.0 0.9 1.0 (0.7) 11.6 8.1 77.1

2007 12.30.9 0.9 0.1 10.5 8.4 81.6

2008 9.9 0.8 0.8 0.0 15.2 8.3 81.9

2009 8.7 0.5 0.5 0.0 12.6 7.3 -

Opinion SUMMARY RATING RATIONALE
The issuer ratings of A2.mx (Mexico National Scale) and Ba2 (Global Scale, local currency) assigned to the State of Sinaloa reflect roughly balanced financial outcomes, which support moderate, and decreasing, debt levels. Between 2005 and 2009, the state recordedcash financing requirements that averaged -0.1% of total revenues, while net direct and indirect debt as a percentage of total revenues decreased from 18.6% in 2005 to 8.7% in 2009. The ratings also take into account recent reforms aiming to reduce currently high unfunded pension liabilities offset by a weakening liquidity position. National Peer Comparisons The State of Sinaloa is rated in themiddle of the rating range for Mexican states, whose ratings span from B1 to Baa1. Sinaloa's position relative to national peers reflects own-source revenue levels above the median of Ba rated Mexican states, debt levels below the median and a liquidity position below the median.

Credit Strengths
Credit strengths for the State of Sinaloa include: - Balanced financial performance - Low debtlevels and low debt servicing costs - Growing economy supports productive own-source revenue base

Credit Challenges
Credit challenges for the State of Sinaloa include: - Narrow liquidity position - High unfunded pension liabilities

Rating Outlook

Rating Outlook
The rating outlook is stable.

What Could Change the Rating - Up
Further progress in maintaining fiscal balance and improvingthe liquidity position, could exert upward pressure on the ratings.

What Could Change the Rating - Down
A weakening of fiscal discipline, leading to the emergence of consecutive cash financing requirements, and/or further deterioration in the state's already narrow liquidity position, could exert downward pressure on the ratings.

DETAILED RATING CONSIDERATIONS
The ratings assigned to thestate of Sinaloa reflect the application of Moody's Joint Default Analysis (JDA) rating methodology for regional and local governments. In accordance with this methodology, Moody's first establishes the baseline credit assessment (BCA) for the state and then considers the likelihood of support coming from the national government to avoid a default by the entity, should this situation ever occur.Baseline Credit Assessment
State of Sinaloa's BCA of 12 (on a scale of 1 - 21, where 1 represents the lowest credit risk) reflects the following factors: Financial Position and Performance The State of Sinaloa has recorded roughly balanced financial outcomes over the last few years. Between 2005 and 2009, total expenditures increased at a compound annual growth rate (CAGR) of 14.8%, in line withtotal revenue growth. The state's ability to maintain balanced financial results, while increasing significantly capital expenditures (CAGR of 32.1% between 2005 and 2009), reflect operating expenditure management, increases in federal transfers and recent initiatives to sustain own-source revenue growth. It is worth mentioning that during the economic slowdown, Sinaloa recorded a balanced...