SUB-SOVEREIGNISSUER IN-DEPTH 20 JULY 2015ANALYST CONTACTSRoxana Munoz 52-55-1253-5721 AVP-Analyst roxana.munoz@moodys.comAlejandro Olivo 5255-1253-5742 Associate Managing Director alejandro.olivo@moodys.comDavid Rubinoff 44-20-7772-1398 MD-Sub Sovereigns david.rubinoff@moodys.comSub-sovereign - Oaxaca, State ofRising Payroll Costs Dents Oaxaca's Finances On 10 July, we affirmed the State of Oaxaca's A2.mx (Mexico National Scale) and Ba2 (Global Scale, local currency) ratings and changed the outlook to negative from stable. We expect the states' liquidity to deteriorate further over the following 2 years as cash financing deficits of the last three years persist. Our affirmation of Oaxacas rating reflects the state's relatively moderate debt levels, and its low pension liabilities compared to national peers.¯ Deficit driven by rising teachers payroll costs. During the last three years, Oaxaca's annual cash financing deficits have averaged -5.9% of total revenues. These deficits were mainly driven by rising current expenditure on teachers salaries, as well as natural disaster recovery costs.¯ Increase in short term debt erodes liquidity. Although Oaxaca has relatively moderate debt, the state has covered the cash financing deficits primarily through short term borrowing, exacerbating its refinancing risks. Short term debt was 24% of Oaxaca's total net direct and indirect debt and 4.5% of the its total revenues, which is a sharp rise considering it didn't have any short-term debt in 2012. Similarly, Oaxaca's liquidity deteriorated to -2.3% of total expenditures from 6.6% in 2013.Deficits driven by rising teachers payroll costs Oaxaca has reported an average cash financing deficit equivalent to -5.9% of total revenues for each of the last three years as rising teachers payroll and natural disaster costs triggered a sharp rise in spending (see Exhibit 1). The compound annual growth rate (CAGR) of Oaxacas current expenditure was 11% between 2010 and 2014, surpassing total revenue CAGR of 9.8%.MOODY'S INVESTORS SERVICE SUB-SOVEREIGNThis publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on www.moodys.com for the most updated credit rating action information and rating history.2 20 JULY 2015 SUB-SOVEREIGN - OAXACA, STATE OF: RISING PAYROLL COSTS DENTS OAXACA'S FINANCESExhibit 1Oaxacas current expenditures have risen sharplySource: State of Oaxaca, MoodysMexican states have been responsible for paying teachers since 1992, when education was decentralized. At the time, the federal government created a Basic Education Fund (Fondo de Aportaciones para la Educaci¢n B sica - FAEB), to help states cover the cost of paying teachers.Currently, the majority of Oaxacas teachers are paid through the Oaxaca State Institute of Public Education (Instituto Estatal de Educaci¢n P£blica de Oaxaca - IEEPO), an independent body w...
