S&P Affirms City of Gomez Palacio, Mexico 'mxA+' Rtg.

Business Editors

NEW YORK--(BUSINESS WIRE)--Standard & Poor's CreditWire

July 10, 2001--Standard & Poor's today affirmed its 'mxA+' rating on the City of Gomez Palacio, Durango, Mexico.

The outlook is stable.

      The rating reflects the following credit strengths:

      --  Good financial performance;
      --  A recent increase in the collection of self-generated
        revenues, including the property tax;
      --  Good levels of expenditure flexibility; and
      --  The existence of external audit reports.

      The city's rating is constrained by:

      --  Preliminary signs of an economic slowdown that could affect
        the highly industrialized economy of the city;
      --  A debt burden, which although somewhat high in the Mexican
        context, remains manageable; and
      --  Debt service that grew to an estimated 6.8% of current
        revenues in 2001 from 2.6% of current revenues in 1999.

The city of Gomez Palacio is located in the northeast of the state of Durango ('mxA-'), in north-central Mexico. In the east it borders the city of Torreon in the state of Coahuila, and together with the city of Lerdo forms an area called "Comarca Lagunera", characterized by the notable presence of maquiladoras and other industries. The city's population was estimated at 272,806 in 2000, representing 19% of the state's population.

Historically agricultural, the city began its industrialization process in the 1980s, and it is becoming an important center of maquiladoras. The economy of the Laguna Region, and in particular Gomez Palacio, has taken advantage of the increasingly mobile capital and labor force within Mexico. As many of the benefits of the twin-plant manufacturing model disappear with the full implementation of NAFTA, cities in north-central Mexico such as Gomez Palacio are becoming more attractive to investors; however, it is still uncertain to what extent the economy of the city will be affected by the likely slowdown of the Mexican economy.

Even though unemployment rates decreased sharply during 2000 in the Laguna Region, 2001 indicators show deterioration. In the first five months of 2001, the unemployment rate rose to 2.3% from 1.8% over the same period in 2000.

Financial performance has strengthened over the past four years. In 2000, the operating balance, before capital expenditures, was about 32.4% of operating revenues. Revenues generated within the city accounted for a substantial 28.9% of total revenues in 2000. A sharp increase in the collection of the real estate tax in 1999 (with a real increase of 106.9%) significantly contributed to that. This tax accounted for 6.7% of total operating revenues and 24% of the city's own revenues. In 2000, however, the collection of the real estate tax grew by 19.4% totaling MxP18.5 million, as expected in the budget.

Nonetheless, the city still receives 70.7% of its total revenues from other levels of government, largely through mandated allocations from the federal government. On the expenditure side, flexibility seems to be significant, with capital expenditures accounting for 27.1% of the budget in 2000 (MxP75.6 million).

Gomez Palacio's debt burden is high in comparison with other Mexican municipalities, though manageable in a Latin American or global context. In April 2001, total direct debt was MxP88.8 million, 32% of operating revenues. Once contingency debt originated in loans contracted by Sideapa ('mxBBB-') -- the decentralized water and sewer company -- is added, outstanding debt increases to MxP98.8 million. In addition, principal amortization and interest payments grew to MxP15.0 million in 2000 from MxP6.3 million in 1999, accounting for 5.4% of operating revenues.

Going forward, the current administration ends in August. Nonetheless, Standard & Poor's does not believe July elections will introduce uncertainty or risk to the current sound fiscal and financial performance.

OUTLOOK: STABLE

The outlook reflects Standard & Poor's expectation that the city will maintain its current strong financial position and sound management policies, while the outlook does not anticipate significant decreases in the debt burden, Standard & Poor's said. -- CreditWire