Fitch: Mexico City's Stabilization Fund Structure Could Spread

NEW YORK & MONTERREY, Mexico--(BUSINESS WIRE)-- A fund created by Mexico City Federal District could effectively shield its project investments from operating budget pressures attributable to the decline in oil and potential future federal budget cuts, Fitch Ratings says. We believe this plan could be replicated by state governments around Mexico.

Stabilization funds are more common at the sovereign level. The fund founded by Mexico City in December was Mexico's first at a regional level. There are few others. Santa Fe, Argentina created a fund in 2005 to smooth the effects of fluctuations created by changes in the economic cycle or negative economic shocks. Santa Fe has used it several times to address natural disasters.

In our view, Mexico City's fund employs best practices as it is a long-term mechanism designed to stabilize revenues and continue the region's investment plans under stressful scenarios. The fund's goal is to address emergencies and improve the region's financial stability. It will be funded by at least 30% of the remaining or unspent resources from past fiscal years. Once the fund's balance equals 0.5% of the region's GDP from the previous year, proceeds could be used to support up to 40% of different types of projects. Some projects must have their funds matched by their overseeing government delegation. Based on Mexico City's 2013 GDP, the fund would need to reach MXN15 billion (USD1 billion) to be used. It would take a few years to reach the target, based on yearly surpluses.

This type of fund could be implemented by other subnational governments in Mexico. However, the funds' effectiveness depends on the entity's financial condition. Fitch believes that the most important conditions are sound public finances, the capability to generate financial surpluses, and robust administration and control procedures.

Additional information is available on www.fitchratings.com.

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

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Fitch Ratings
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Source: Fitch Ratings

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