Not only citizens and consumption will suffer with the increase in credit prices, so will state and municipal governments, since the rise in the reference interest rate of the Bank of Mexico (Banxico) will make new financing more expensive for administrations, including those who just won last June’s elections.
Chihuahua, Nuevo León, Sonora, Zacatecas and Nayarit are among the states that are new governors this year and that, at the end of the first quarter of 2021, had the highest indices of contracted debt in proportion to the transfers made by the Federation through participations Unrestricted resources that serve as collateral for banks to grant loans.
Unlike the federal government, the states have 100% of their public debt contracted with national financial institutions, to which the change in the central bank rate does apply, in addition to the fact that on average 80% of the contracted loans are at variable rate, explained in an interview Tamón Takahashi, general director of the research center AGV Analytics.
The Bank of Mexico increased its reference interest rate on June 24 against all forecasts of private banks in order to increase the price of money, reduce demand, and therefore, amortize the price increase in products and services .
The rate was 4.25%, the rise was 25 basis points. Inflation, in the first half of June, was 6.02%, double the goal of Banxico; 3% plus or minus one percentage point.
All the costs of the debts of the states would see increases and their public finances would be slightly adjusted , the governors who begin their administration this year will suffer more from this rise, since they will have greater administrative needs to seek loans.
“The state governments that enter are going to require more resources, they are going to require short-term debt like crazy, in particular for the last quarter, credit will be a little more expensive,” Takahashi warned.
States can issue two types of debt, short and long-term, the first can be used to pay current expenses such as payroll, operating expenses, while the second can be used for investment concepts.
They have a greater need for credit
“The entities have unsecured loans (short term) with commercial banks to pay their payroll or structured financing (long term), that is to say that a commercial bank absorbs a percentage of the debt of a state or that finances a certain trust or certain plan of spending ”, explained Manuel Molano, chief economist of the Mexican Institute for Competitiveness (Imco).
These resources depend on the Interbank Equilibrium Interest Rate (TIIE), so if the benchmark rate of Banxico rises, the TIIE rises and that can make financing more expensive for states and municipalities, Molano explained.
Credit needs become more urgent as a result of lower rates in financial transfers from the federal government: Figures from the Treasury detail that the payment of shares from January to May of this year decreased by 1.4% in real annual terms.
In all of 2020, the shares decreased by 7.2% in real terms compared to 2019. In 2018 and 2019, resources from the Stabilization Fund of the Federal Entities (FEIEF) were activated to compensate for missing income compared to what was programmed.
“The state debt market has been very soulless, I think the issue has to do with superdelegates, and that shares have been very restricted. If there are no participations or these are restricted, and you want to take on structured financing in the stock market (long-term) or restructure debt, the request is complicated ”, commented Molano.
