Debts and the COVID-19 pandemic affect Mexican states

The current administration, led by President Andrés Manuel López Obrador, cut off MXN 18,456 million from the federal budget allocated to the states during the first five months of 2020, according to an analysis released by the lower chamber’s Center for the Study of Public Finances.

The budget cuts affecting the states’ finances were registered in areas such as education, health, security, infrastructure, among other areas.

The lower economic activity sparked by the COVID-19 pandemic is one of the reasons why the federal government obtained fewer resources through tax collection, therefore affecting the amount of resources states receive.

Nevertheless, another main factor was a decrease in oil profits.

Although the federal government was expected to provide MXN 335,040 million during the first months of 2020, it only provided MXN 324,784 million; that is, MXN 10,256 million less than expected.

At least six states were affected by the budget decrease: Mexico City, Hidalgo, Baja California, Aguascalientes, Tamaulipas, and Chiapas.

Mexico City, governed by Mayor Claudia Sheinbaum, was the most affected state. Although the federal government was supposed to provide MXN 23,573 million, it only provided MXN 20,952 million.

Meanwhile, Hidalgo registered a deficit of MXN 482 million; Baja California received MXN 121 million less; Chiapas received MXN 82 million less; Aguascalientes registered a deficit of MXN 38 million, and Tamaulipas received MXN 54 million less.

The analysis showed that, in total, 21 states received less money than expected: Zacatecas, Coahuila, Campeche, Sonora, State of Mexico, Tamaulipas, Hidalgo, Sinaloa, Nayarit, Durango, Guanajuato, Chihuahua, Quintana Roo, Yucatán, Puebla, Tabasco, Mexico City, Chiapas, Michoacán, Morelos, and Jalisco.

The states’ debts amount to MXN 641,853 million.

The states with the largest debts are Mexico City, Nuevo León, Chihuahua, State of Mexico, and Veracruz.

These five states concentrate 51.1% of the sub-national debt.

Budget cuts affect local finances

Experts said that the budget cuts will have a significant impact on local finances.

Marco Cancino, the director of Inteligencia Pública, explained that in the case of federal contributions, the decrease in resources could have an impact on programs meant to reduce poverty and marginalization, something that could worsen these problems in many states.

Cancino added that the cuts will land state governments in trouble because these resources are used to pay the bureaucracy’s payroll and finance state programs. Moreover, the expert emphasized that sub-national governments use these resources to back stock and bank credits.

Marco Cancino explained that the decrease in resources is the result of economic dynamism but that the government might be reassigning its budget to use it in other areas.

On the other hand, Héctor Villarreal, the director of the Center for Economic and Budget Research, indicated that the negative effects must be compensated through the stabilization funds. Villarreal emphasized that the big issue is not 2020; however, Mexico will face a series of challenges in 2021.

The expert said that states could contract debts to face the financial challenges, it is important to do so in an orderly manner.

Meanwhile, Patricia Terrazas Baca, the head of the lower chamber’s Finance Commission, said that although tax collection registered a decrease and oil prices collapse explain the cut in federal resources for the states, the real problem is that state governments lack support from the federal government.

Terrazas Baca said, “States aren’t receiving additional resources and the states and townships are overcoming the pandemic with their resources, without additional support.” She added that “Tax revenue has fallen.”

Townships are in debt

From January to March 2020, townships distributed the balance of their financial obligations the following way: 47.8% from the development bank; 44.2% came from commercial banks; 3.2% from bond placements, and 4.8% from trusts.

Between April and June 2020, the townships with the highest debts were Tijuana, Monterrey, Hermosillo, Guadalajara, and León.

The townships with the highest debt per capita are Cozumel, Quintana Roo; Puerto Peñasco, Sonora; Agua Prieta, Sonora; Solidaridad, Quintana Roo; Guaymas, Sonora; San Nicolás de los Garza, Nuevo León.

Enrique Díaz-Infante Chapa, a finance and social security expert from the Espinosa-Yglesias Center, explains that since small-sized enterprises lack the support of the federal government, municipal and state authorities have had to take over this responsibility; however, the reduction of federal resources and the decrease in tax collection also affected local finances.

Diego Vázquez, an economist working for Oxfam, explained that any measure implemented during a situation like this will have an important economic price. He said that states acquire debt without financial solidity and emphasized that “it is not very clear if when the economy recovers they will be able to pay.”

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