Subnational Capital Markets in Developing Countries: From Theory to Practice

By John Petersen; Mila Freire | Go to book overview

Chapter 17
Latin American and the Caribbean
Mexico

Using credit ratings can be an effective means of instilling a
culture of creditworthiness
.

Steven Hochman and Miguel Valadez


Lessons

Mexico has traditionally been a highly centralized state, with the
states and local governments having centrally assigned duties
and limited fiscal autonomy. Except for the local property tax,
local revenue options are limited, and the states especially are
heavily dependent on federal transfers. However, reforms in re-
cent years are improving financial flexibility at the municipal
level and increasing capacity to borrow in private markets.

In the 1990s Mexico’s federal government inadvertently in-
volved itself in the decisionmaking for subnational borrowing
through pledged transfers and the implicit guarantee of local
government bailouts that came with them. Accordingly, credi-
tors took little time to conduct thorough evaluations of subna-
tional finances, and some local governments borrowed beyond
their means. The 1994–95 financial crisis exposed these defi-
ciencies and necessitated a costly federal bailout program that
forced a rethinking of subnational lending parameters.

-299-

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