One Third of Local Debt to Shift Under New Governors

The nine states that will hold gubernatorial elections on June 2 collectively hold a third of the debt in entities and municipalities, as reported by the Ministry of Finance and Public Credit. While none of these states are currently on alert due to their debt levels, the high financial cost remains a significant challenge for future administrations. Chiapas, Guanajuato, Jalisco, Morelos, Puebla, Tabasco, Veracruz, Yucatán, and Mexico City will be electing new governors. Together, these states had a combined debt balance of 229,882.5 million pesos at the end of 2023, accounting for roughly a third of the total indebtedness of states and municipalities.

Ricardo Gallegos, the deputy general director of Economic Analysis at HR Ratings, noted that local debt has been reduced since 2015, following the Financial Discipline Law. During the pandemic, state governments did not increase their debt levels, utilizing available resources to address the crisis. However, the high financial costs continue to be a concern for future administrations. Most state governments have primarily refinanced existing debt rather than acquiring new debt. Additionally, federal funding for major infrastructure projects has played a role in limiting some states’ debt growth, although it has also led to a decrease in productive investments.

The Financial Discipline Law requires local administrations to settle short-term obligations at least three months before the end of their term. Nearly all states had met this requirement by December, with the exception of Yucatán. The Treasury closely monitors the sustainability of state debt, with most states deemed not at risk except for Veracruz due to a significant portion of its available resources being used to service financial obligations.

In terms of debt trends, some states have seen reductions in debt balances, while others have experienced increases. In nominal terms, Guanajuato, Jalisco, and Yucatán saw increases in debt, with significant growth in Yucatán under the current administration. Adjusting for inflation, debt has only increased in Guanajuato, Jalisco, and Yucatán over the past five years.

In light of the upcoming gubernatorial elections in these nine states, managing debt levels and financial costs will be significant challenges for the new administrations. Monitoring debt sustainability and maintaining a balance between refinancing existing debt and investing in productive projects will be crucial for ensuring the financial stability of these states in the years to come.