Economics: State Debt Monitor Falls Short
The Ministry of Finance has published its “Alert System” of state government debt, as well as the indicators on which its new color coded alerts are based, which in this inaugural edition corresponded to readings of subnational government finance for year-end 2016.
The system ranked one state (Coahuila) in a red alert category, which in principle means it will not be allowed any net increase in debt next year. Ten other states were scored with a "caution light", meaning that they can take on no more debt than the equivalent of 5% of their unrestricted revenues for 2018. The remaining states were given a “green light” ranking of financial health.
It is important to note that while there has been a significant increase in recent years in the volume of transfers the federal government sends the states, the states themselves generate only a tiny fraction of their revenue needs. And while a growing number of states are in precarious fiscal health, with many taking on disproportionate levels of debt, Mexico continues to lack any strategy to correct these problems.
In this week's Economic Outlook we analyze subnational debt in the context of this new alert arrangement, a monitoring system that is a step in the right direction, but one that is woefully inadequate for the job at hand.
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