October 23, 2024

Subnational Government Debt in Mexico

In recent years, the subnational debt landscape in Mexico has undergone significant transformation. With the constant evolution of fiscal policy and a closer focus on debt sustainability, it has become crucial for policymakers, financial institutions, and citizens to keep track of these developments.

The Growing Importance of Subnational Debt Transparency

In 2024, Mexico’s subnational governments have become more reliant on various financing instruments to support their fiscal needs. As of September 2024, the Public Register of States and Municipalities’ Financing and Obligations recorded 1,809 financial transactions totaling MXN $904 billion, with a standing balance totaling MXN $692 billion. The report, compiled by the Mexican Finance Ministry, offers an unprecedented look into how subnational governments manage their financial obligations through a range of instruments such as simple credit lines, public-private partnerships and bonds.

Key Findings of the 2024 Report

The data reveals a wide range of financial activities across the country, with notable contributions from leading financial institutions. Among them, BANOBRAS, the national public development bank, played a critical role with 1,094 transactions for MXN $304 billion, reflecting the institution’s key role in supporting state and municipal governments. BBVA, Banorte and Santander are the main private financial institutions in subnational debt.

Notably, simple credit has been the main source of funding with 1,522 transactions for MXN $762 billion, 84% of the contracted amount, with a remaining balance for MXN $617 billion, 89% of the standing balance as of June 2024. Public-private associations related obligations and bonds are also relevant financial instruments.

Mexico City, with 51 transactions, leads the nation in terms of total contracted amounts, with MXN $148 billion accounting for over 16% of the country’s subnational debt. Other key states include Nuevo León, State of Mexico, Veracruz, Jalisco and Baja California, each showing significant financial obligations.

Another critical finding of the report revolves around the average tenor of the debt, which spans 10 years and 8 months, with an average effective interest rate of 9.84%. This suggests that subnational entities are securing relatively long-term financing but at relatively high costs.

The report provides histograms for the whole database of the original contracted amount, the balance as of 30 June 2024, tenor, interest rate premium, and effective interest rate. The charts and tables show the heterogeneity among the 1,809 transactions.

Alert System of Municipalities’ Financing and Obligations

The report provides summary statistics and maps at the municipal level of 1) debt and obligations, 2) debt and obligations service, 3) short-term obligations and suppliers and contractors, 4) total income, 5) free disposal income and 6) assets.

In terms of risks, the Alert System of Municipalities’ Financing and Obligations provides a detailed evaluation of municipalities at risk. To do so, it reports summary statistics and maps at the municipal level of 3 indicators that are part of the alert system, which are: 1) public debt and obligations over free disposal income, 2) debt and obligations service over free disposal income, and 3) short-term obligations and suppliers and contractors over total income. The maps show the heterogeneity in debt sustainability at the municipal level.

In addition, we have constructed a new indicator, debt and obligations service over public debt and obligations, to get a sense of the average cost of the financing. The map of this indicator shows also large heterogeneity in financing costs.

The Future Outlook for Subnational Debt Management

As Mexico moves forward into 2025, subnational governments must continue to balance their fiscal needs with sustainable debt levels. With ongoing scrutiny from federal authorities and a renewed focus on transparency, it will be crucial for state and municipal governments to diversify their funding sources and optimize their debt portfolios.

For investors and financial professionals, the current state of subnational debt offers both opportunities and challenges. As municipalities and states seek to refinance their existing obligations, there will be potential for innovative financial instruments and partnerships that can offer more favorable terms. Meanwhile, for policymakers, keeping a close eye on the evolving risk profiles of these subnational entities will be essential in ensuring long-term fiscal sustainability.

Key Takeaways:

Mexico City, Nuevo León and State of Mexico are the largest players in subnational debt.
Financial institutions like BANOBRAS, BBVA, BANORTE and Santander are key facilitators in this financial ecosystem, supporting states and municipalities in their borrowing needs.
Simple credits are the main financial transactions.
The report provides histograms and summary statistics of the 1,809 transactions to see the distribution of the original contracted amount, the balance as of 30 June 2024, tenor, interest rate premium, and effective interest rate.
Using maps at the municipal level, the report highlights significant variations in the Alert System of Municipalities’ Financing and Obligations by showing the current state of the following 4 indicators: 1) public debt and obligations over free disposal income, 2) debt and obligations service over free disposal income, 3) short-term obligations and suppliers and contractors over total income and 4) debt and obligations service over public debt and obligations.