“One of the great challenges with these geopolitical problems is the slowdown in developed economies, including the United States, and the impact it can have on emerging nations. That is one of the great risks that Mexico has in its states and municipalities because the federal government gives them the shares. So, it is closely linked to the economic cycle,” warned the specialist.
“Any impact on economic growth has a very rapid effect on the income of states and municipalities,” he added.
Another factor to take into account is inflation, because although it represents a boost for income, it also puts “a lot of pressure on spending.”
In addition, there is the reference interest rate of Banco de México, which has been rising in recent meetings of the Governing Board. However, because the states have “moderate indebtedness”, the Moody’s Local Mexico analyst sees less risk for the entities due to this factor.
“We see more of the risk in terms of inflation and economic growth, because in the future those revenues that are growing well right now may be reduced in 2023 and 2024,” he commented.
According to Martínez-Richa, “if nothing else happens, with the expectations of higher interest rates and inflation control”, states and municipalities will recover the levels they had before the pandemic between 2023 and 2024, “more around 24”.
Among the risks that could affect economic growth downwards is a deterioration in public security indicators, high levels of inflation and the continuation of internal uncertainty and that this affects investment, says the Report on regional economies January-March 2022 of Banxico.
Most analysts have reduced their growth forecasts for the national economy this year, to place it at a maximum of 2%, a level well below the 3.4% expected by the Ministry of Finance and Public Credit.
Investment
María del Carmen Martínez-Richa highlighted the fact that investment in the country “has not stopped”. Although it is true that problems in supply chains continue, which can translate into delays in production, foreign investment “continues to flow in a large part of the sectors.”
Particularly in sectors such as the automotive industry, in the Bajío and northern states of Mexico, where the sector’s production chains are well positioned.
In the south southeast, the region that the federal administration has proposed to promote, “we still do not see these policies being consolidated. Let’s see what happens,” said the Moogy’s Local analyst.
Banxico’s regional economies report maintains that in the first quarter of 2022 the northern region showed levels of activity above what it had in the same period of 2020. The central region showed that they were similar to those of the first quarter of two years ago. years and the south was slightly below what was observed before the pandemic.
Rating Changes
To avoid volatility in national scale credit ratings and to use a rating scale with which the market is more familiar, Moody’s Local has made changes to its rating.
“Previously, the ratings of states, municipalities and other sectors depended a lot on the risk of the sovereign government. When there was any rating action, states and municipalities were reviewed and, sometimes, although their rating did not change globally -the one we first assigned- they could change their rating in national stake, even if the issuer had no significant change,” explained Martínez. -Richa.
This, he added, caused some volatility in ratings on a national scale. There will always be a relationship between the sovereign government because of the way states and municipalities work, but it will no longer be reflected as before in the ratings. With the new methodology for assigning grades comes another nomenclature.
For example, he detailed, the AA+, which is used by other agencies, was previously called AA1. Right now we are from an AAA, AA with the + (positive) and – (negative), to refer to the perspective.
“It is a rating scale with which the market is most familiar. This is going to help a lot to make it easier for investors and the general public to compare the rating levels that are given,” she assured.
