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Comparative Statistics: Local And Regional Government Risk Indicators: Spending Pressure Will Erode Fiscal Margins For LatAm LRGs

This report does not constitute a rating action.

S&P Global Ratings assigns credit ratings to local and regional governments (LRGs) based on their qualitative and quantitative analysis of a range of financial, economic, managerial, and institutional factors. We articulate our analytical framework for rating LRGs around six major components resulting from our methodology: the institutional framework; economy; financial management; budgetary performance; liquidity; and debt burden.

Our assessment of the institutional framework is an important component of the rating. The institutional and legislative environment in which an LRG operates provides important context to our evaluation of the LRG's individual credit profile. Therefore, we combine our assessment of the institutional framework and the five other factors listed above to determine an indicative credit level for an individual LRG. We then adjust this level for certain overriding factors to provide the final rating for the respective LRG (see "Methodology For Rating Local And Regional Governments Outside Of The U.S.," published July 15, 2019).

Table 1

Latin American Local And Regional Government Risk Indicators (Global Scale)
--Rating factor assessments--
Foreign currency ratings* National scale ratings* Institutional framework Economy Financial management Budgetary performance Liquidity Debt burden
Mexico

BBB/Stable/A-2

mxAAA/Stable/--
'BBB' rating category

Guanajuato (State of)

BBB/Stable/-- mxAA+/Stable/-- 4 5 3 3 1 1

Queretaro (City of)

BBB/Stable/-- mxAAA/Stable/-- 5 4 3 1 1 1

Queretaro Arteaga (State of)

BBB/Stable/-- mxAA+/Stable/-- 4 4 3 4 1 1
Brazil BB-/Stable/B brAAA/Stable/--
'BB' rating category

Alagoas (State of)

BB-/Stable/-- brAA+/Stable/-- 5 5 3 3 3 3
'B' rating category

Santa Catarina (State of)

B+/Positive/-- brAA/Positive/-- 5 4 4 3 4 2
'SD' rating category

Minas Gerais (State of)

SD/--/-- SD/--/-- 5 5 5 5 5 4
Argentina CCC+/Stable/C raBBB-/Stable/--
'CCC' rating category

Jujuy (Province of)

CCC+/Stable/-- NR 6 5 5 4 5 4

Buenos Aires (City of)

CCC+/Stable/-- raBBB-/Stable/-- 6 4 3 3 4 3

Neuquen (Province of)

CCC+/Stable/-- NR 6 5 5 5 5 2

Entre Rios (Province of)

CCC+/Stable/--

NR 6 5 5 4 5 2

Mendoza (Province of)

CCC+/Stable/-- NR 6 5 5 3 5 3

Rio Negro (Province of)

CCC+/Stable/-- NR 6 5 5 5 5 3

Salta (Province of)

CCC+/Stable/-- NR 6 5 5 4 5 2

Buenos Aires (Province of)

CCC+/Stable/-- raBB+/Stable/-- 6 5 5 5 5 3

La Rioja (Province of)

CCC+/Stable/-- NR 6 5 5 4 5 3
*Issuer credit rating as of Sept. 16, 2022. SD--Selective default. NR--Not rated. Note: Institutional framework assessement is based on a six-point scale where 1 is the strongest and 6 the weakest, while the other factors consider a scale from 1 to 5, being 1 the strongest score and 5 the weakest.

Table 2

Latin American Local And Regional Government Financial And Economic Statistics (Global Scale)
--Local GDP (nominal) per capita (US$)-- --National GDP (nominal) per capita (US$)-- --Operating balance (% of operating revenue)-- --Balance after capital accounts (% of total revenue)-- --Direct debt (% of operating revenue)-- --Tax-supported debt (% of consolidated operating revenue)-- --Interest (% of operating revenue)--
2021a 2021a 2021a Five-year average 2021a Five-year average 2021a Five-year average 2021a Five-year average 2021a Five-year average
Mexico
'BBB' rating category
IPF median Mexico 11,845.1 9,929.8 7.7 10.4 (6.0) (2.5) 0.0 0.1 0.0 0.1 0.0 0.0

Guanajuato (State of)

8,558.4 9,929.8 1.8 6.6 (6.3) (3.4) 12.4 10.0 12.4 10.0 0.5 0.7

Queretaro (City of)

14,660.7 9,929.8 29.0 27.4 6.3 0.5 0.0 0.0 0.0 0.0 0.0 0.0

Queretaro Arteaga (State of)

11,845.1 9,929.8 7.7 10.4 (6.0) (2.5) 0.0 0.1 0.0 0.1 0.0 0.0
Brazil
IPF median Brazil 6,629.3 7,513.2 13.6 10.0 2.9 2.1 72.3 73.2 72.3 73.2 2.6 3.1
'BB' rating category

Alagoas (State of)

3,704.9 7,513.2 23.0 15.9 (6.0) 2.1 72.3 73.2 72.3 73.2 2.5 3.1
'B' rating category

Santa Catarina (State of)

9,776.7 7,513.2 13.6 10.0 5.9 2.6 71.2 66.8 71.2 66.8 2.6 2.5
'SD' rating category

Minas Gerais (State of)

6,629.3 7,513.2 7.7 2.7 2.9 (0.5) 144.7 156.1 144.7 156.1 6.6 3.5
Argentina
'CCC' rating category
IPF median Argentina 6,566.0 10,614.8 10.0 6.2 3.1 (1.8) 41.3 42.3 41.3 42.3 3.3 3.2

Jujuy (Province of)

5,998.2 10,614.8 15.5 9.8 3.6 (1.8) 73.5 70.1 73.5 70.1 3.8 3.6

Buenos Aires (City of)

27,729.1 10,614.8 9.2 9.2 (3.5) (2.5) 40.3 32.5 40.3 32.5 7.6 5.5

Neuquen (Province of)

15,698.6 10,614.8 9.2 3.7 3.1 (4.3) 46.7 50.7 46.7 50.7 2.7 3.8

Entre Rios (Province of)

6,500.5 10,614.8 10.0 5.1 6.1 0.3 33.7 31.7 33.7 31.7 2.7 2.2

Mendoza (Province of)

6,566.0 10,614.8 12.3 8.8 5.4 1.2 46.3 42.3 46.3 42.3 3.6 3.2

Rio Negro (Province of)

6,900.4 10,614.8 3.1 2.1 (4.2) (4.1) 41.3 37.4 41.3 37.4 3.7 3.7

Salta (Province of)

3,639.6 10,614.8 8.8 6.2 4.9 0.3 30.6 25.2 30.6 25.2 2.4 2.3

Buenos Aires (Province of)

9,900.7 10,614.8 0.3 0.7 (4.5) (4.0) 55.4 54.7 55.4 54.7 3.3 2.8

La Rioja (Province of)

3,878.8 10,614.8 12.2 7.8 0.4 (0.5) 40.9 39.3 40.9 39.3 0.3 2.0
Note: Five-year averages cover 2020-2024. Data refers to actuals whenever available, then estimates or base cases whenever available. a--Actual. IPF--International public finance. N.A.--Not available.
The data and ratios above result in part from S&P Global Ratings' own calculations, drawing on national as well as international sources, reflecting S&P Global Ratings' independent view on the timeliness, coverage, accuracy, credibility, and usability of available information. The main sources are the financial statements and budgets, as provided by the issuer.

Table 3

Latin American Local And Regional Governments Risk Indicators (Issuers With Only National Scale Ratings)
--Rating factor assessments--
National scale ratings* Institutional framework Economy Financial management Budgetary performance Liquidity Debt burden
Brazil brAAA/Stable/--

Paraiba (State of)

brAA+/Stable/-- 5 5 4 3 3 2
Mexico mxAAA/Stable/--

Queretaro (City of)

mxAAA/Stable/-- 5 4 3 1 1 1

Aguascalientes (State of)

mxAA+/Stable/-- 4 5 3 3 1 1

Guanajuato (State of)

mxAA+/Stable/-- 4 5 3 3 1 1

Leon (City of)

mxAA+/Stable/-- 5 4 3 3 2 1

Queretaro Arteaga (State of)

mxAA+/Stable/-- 4 4 3 4 1 1

Merida (City of)

mxAA/Positive/-- 5 4 3 3 2 1

Puebla (City of)

mxAA/Stable/-- 5 5 3 2 2 1

Saltillo (City of)

mxAA/Stable/-- 5 5 3 2 2 1

Torreon (City of)

mxAA/Stable/-- 5 5 3 3 2 1

Morelia (City of)

mxAA-/Stable/-- 5 5 4 3 2 1

Mexico (State of)

mxAA-/Stable/-- 4 5 3 4 3 1

San Nicolas de los Garza (City of)

mxAA-/Stable/-- 5 3 3 4 2 2

Cajeme (City of)

mxA+/Stable/-- 5 5 4 4 2 2

Guadalajara (City of)

mxA+/Stable/-- 5 4 4 3 4 1

Mazatlan (City of)

mxA+/Stable/-- 5 5 4 3 3 1

Tijuana (City of)

mxA+/Stable/-- 5 5 4 4 2 1

Campeche (State of)

mxA+/Stable/-- 4 5 4 5 2 1

Chiapas (State of)

mxA/Stable/-- 4 5 4 5 3 1

Hidalgo (State of)

mxA/Positive/-- 4 5 4 4 3 1

Nuevo Leon (State of)

mxA/Stable/-- 4 3 3 4 4 4

Sinaloa (State of)

mxA/Stable/-- 4 5 4 5 4 1

Los Cabos (City of)

mxA-/Positive/-- 5 5 4 3 3 2

Oaxaca (State of)

mxA-/Positive/-- 4 5 4 4 4 1

General Escobedo (City of)

mxBBB+/Positive/-- 5 4 4 4 4 2

Navojoa (City of)

mxBBB/Stable/-- 5 5 5 4 4 1

Guadalupe, N. L. (City of)

mxBBB+/Positive/-- 5 4 4 3 4 1

Guaymas (City of)

mxBBB/Stable/-- 5 5 4 3 2 3

Guerrero (State of)

mxBBB-/Positive/-- 4 5 4 5 4 3

Michoacan (State of)

mxBBB-/Stable/-- 4 5 4 5 4 2

Veracruz (State of)

mxBBB-/Positive/-- 4 5 4 5 4 3
*Issuer credit rating as of Sept. 16, 2022. Note: Institutional framework assessement is based on a six-point scale where 1 is the strongest and 6 the weakest, while the other factors consider a scale from 1 to 5, 1 being the strongest.

Table 4

Latin American Local And Regional Governments Financial And Economic Statistics (Issuers With Only National Scale Ratings)
--Local GDP (nominal) per capita (US$)-- --National GDP (nominal) per capita (US$)-- --Operating balance (% of operating revenue)-- --Balance after capital accounts (% of total revenue)-- --Direct debt (% of operating revenue)-- --Tax-supported debt (% of consolidated operating revenue)-- --Interest (% of operating revenue)--
2021a 2021a 2021a Five-year average 2021a Five-year average 2021a Five-year average 2021a Five-year average 2021a Five-year average
IPF LatAm median 10,046.5 9,929.8 8.7 10.4 2.1 0.7 15.4 14.2 15.4 14.2 0.9 1.0
Brazil

Paraiba (State of)

3,697 7,513 18.5 13.4 10.4 5.4 38.0 35.5 38.1 35.6 0.9 1.0
Mexico

Queretaro (City of)

14,661 9,930 29.0 27.4 6.3 0.5 0.0 0.0 0.0 0.0 0.0 0.0

Aguascalientes (State of)

11,745 9,930 7.2 6.6 -1.7 0.0 13.9 12.4 13.9 12.4 0.9 1.0

Guanajuato (State of)

8,558 9,930 1.8 6.6 -6.3 -3.4 12.4 10.0 12.4 10.0 0.5 0.7

Leon (City of)

10,046 9,930 20.6 16.1 2.1 1.3 15.1 14.2 15.1 14.2 0.9 1.0

Queretaro Arteaga (State of)

11,845 9,930 7.7 10.4 -6.0 -2.5 0.0 0.1 0.0 0.1 0.0 0.0

Merida (City of)

11,990 9,930 11.8 11.0 4.8 -1.0 0.0 0.0 0.0 0.0 0.0 0.0

Puebla (City of)

6,609 9,930 14.3 15.8 -5.6 -0.8 0.0 1.1 0.0 1.1 0.0 0.1

Saltillo (City of)

14,874 9,930 15.8 15.5 -1.8 -0.5 0.0 0.0 10.6 9.8 0.0 0.0

Torreon (City of)

12,649 9,930 16.8 15.6 4.0 4.0 15.4 13.9 15.4 13.9 0.0 0.0

Morelia (City of)

10,630 9,930 23.0 18.9 7.4 2.6 1.1 9.6 1.1 9.6 0.0 0.7

Mexico (State of)

6,547 9,930 7.8 7.3 -2.7 -1.3 19.7 19.7 19.7 19.7 1.4 1.7

San Nicolas de los Garza (City of)

22,366 9,930 7.8 7.4 -5.5 0.9 47.0 42.7 47.0 42.7 2.7 3.0

Cajeme (City of)

9,846 9,930 8.7 9.4 2.4 1.9 42.3 39.1 42.3 39.1 2.3 2.1

Guadalajara (City of)

12,214 9,930 14.6 10.9 8.3 3.7 15.8 15.2 15.8 15.2 0.9 1.0

Mazatlan (City of)

14,135 9,930 7.0 5.5 4.1 1.7 7.0 6.0 7.0 6.0 0.4 0.5

Tijuana (City of)

13,795 9,930 26.7 13.6 19.8 4.5 28.2 29.1 28.2 29.1 1.4 1.8

Campeche (State of)

8,238 9,930 3.1 4.0 -0.8 -0.6 10.6 9.6 10.6 9.6 0.7 0.8

Chiapas (State of)

3,409 9,930 34.7 12.0 33.1 7.7 23.2 21.6 23.2 21.6 0.9 1.2

Hidalgo (State of)

6,323 9,930 5.1 5.6 1.2 -0.4 8.9 7.7 8.9 7.7 0.5 0.5

Nuevo Leon (State of)

17,041 9,930 2.7 2.6 -2.3 -4.3 56.3 59.2 56.3 59.2 4.3 4.9

Sinaloa (State of)

9,209 9,930 1.4 3.8 -2.0 -0.5 6.9 6.3 6.9 6.3 0.5 0.5

Los Cabos (City of)

15,974 9,930 27.7 17.9 13.2 4.7 9.5 10.1 9.5 10.1 0.7 0.8

Oaxaca (State of)

4,837 9,930 1.1 4.6 -2.7 -0.6 22.1 21.6 22.1 21.6 2.1 2.0

General Escobedo (City of)

16,156 9,930 21.3 18.0 7.0 1.4 41.6 39.6 41.6 39.6 1.1 2.0

Navojoa (City of)

10,686 9,930 5.6 7.5 -6.6 -4.6 28.3 22.4 28.3 22.4 1.5 1.6

Guadalupe, N. L. (City of)

8,846 9,930 17.8 16.1 5.1 0.9 40.1 31.9 40.1 31.9 1.6 1.6

Guaymas (City of)

9,489 9,930 21.8 17.6 7.8 4.7 44.6 42.1 44.6 42.1 3.5 3.9

Guerrero (State of)

4,995 9,930 3.3 2.3 2.6 0.7 5.8 5.9 5.8 5.9 0.2 0.3

Michoacan (State of)

6,426 9,930 1.7 1.1 -4.6 -1.1 30.6 28.5 30.6 28.5 1.8 2.8

Veracruz (State of)

6,731 9,930 -0.2 2.5 -1.2 1.7 34.2 32.5 34.2 32.5 2.7 2.7
Note: Five-year averages cover 2020-2024. Data refers to actuals whenever available, then estimates or base cases whenever available. a--Actual. IPF--International public finance. LatAm--Latin America. N.A.--Not available.
The data and ratios above result in part from S&P Global Ratings' own calculations, drawing on national as well as international sources, reflecting S&P Global Ratings' independent view on the timeliness, coverage, accuracy, credibility, and usability of available information. The main sources are the financial statements and budgets, as provided by the issuer.

LRG Characteristics By Country And Rating Category

With most of the Latin American economies still bouncing back from the pandemic-induced recession, the fiscal impact of inflation on local governments in Latin America has so far been subdued, and we expect most LRGs will avoid significant budgetary strain in 2022 even as growth in the U.S. and China slows. The lagging budgetary impact of inflation and a relatively strong starting position following unexpectedly positive fiscal performance in 2021 means that median operating results across the region will be largely positive, while after-capital results will remain close to balance this year.

We expect pressure on expenditure to pick up in fiscal 2023, although we do not foresee widespread credit deterioration for LRGs in Mexico and Brazil over the next two years, despite dimmer growth forecasts. Debt levels across the region will remain low compared to operating revenue as local governments contain spending and capital markets remain largely inaccessible. Still, should growth in the U.S. and China slow beyond our base-case scenario, emerging markets, including those in Latin America, could see trade and financial conditions deteriorate, further dampening already-weak economic growth.

Mexico

Among LRGs in Mexico, we expect slightly less positive performance averaged over 2020-2024 compared with 2021; however, we do not forecast significant budgetary strain in the next two years despite global economic conditions. As has historically been the case, we believe Mexican LRGs we rate will maintain nominal fiscal balance and avoid borrowing, financing operating and capital expenditure with cash or forgoing spending altogether.

Inflation and weak economic growth prospects across Mexico mean that revenue for states and cities, which rely primarily on shared revenue from the sovereign, will likely decline in real terms over the next two years. Still, we believe LRGs will contain expenditure growth at or below inflation, and we project median debt levels, already low by international standards, will decline slightly over the next several years as infrastructure spending remains a low priority and capital execution fails to keep up with deferred needs.

Capital expenditure, which had declined significantly as a share of total expenditure from 2014-2020, will remain low in the next couple of years as local governments operate with constrained financial flexibility. With very few exceptions, the Mexican LRGs we rate tend to have low debt compared with that of international peers, reflecting both an anti-debt political posture and very low capital expenditure, despite high infrastructure needs.

S&P Global Ratings rates three Mexican LRGs on the global scale: The States of Guanajuato and Queretaro and the City of Queretaro (all at BBB/Stable/--). We revised our outlooks on these entities to stable from negative in July following a similar rating action on Mexico (see "Global Scale Outlook On Three Mexican Local Governments Revised To Stable From Negative On Same Sovereign Action," published July 7, 2022, on RatingsDirect).

We rate all other rated Mexican federated entities and municipalities on the Mexican national scale only. Mexican national scale ratings of 'mxAA' and higher typically correspond to 'BBB' category global scale ratings (see "Guidance: Methodology for National and Regional Scale Credit Ratings," published Oct. 26, 2021). Mexican national scale ratings between 'mxBBB' and 'mxAA' typically correspond to the 'BB' category.

'BBB' category entities and peers rated on the national scale typically have stronger financial management and stronger liquidity than lower-rated peers. Local economic indicators, including GDP per capita, often exceed the national level of $9,930, although very few rated local governments in Mexico have economic assessments above levels we consider weak compared with those of global peers.

Despite historically strong operating results and low debt levels, all subnational governments in Mexico contend with a highly centralized form of fiscal federalism that limits their influence on policies that affect their finances and control over revenue. We consider that Mexican municipalities operate in an institutional framework that is volatile and unbalanced (see "Institutional Framework Assessment: Mexican Municipalities," published May 26, 2022), while Mexican states operate in an evolving and unbalanced framework (see "Institutional Framework Assessment: Mexican States," published May 23, 2022). One key difference between them is that fiscal transparency is still uneven among Mexican municipalities. In addition, state governments can easily pass on their financial woes to municipalities by delaying transfers to them.

Among lower-rated entities, weak accounting standards and interruptions in financial reporting following governmental transitions partially reflect the lack of clear separation of professional management and political responsibilities. These issues, where present, inform our assessment of municipalities' financial management, as well as our evaluation of the fiscal policy framework in our Institutional Assessment.

Argentina

All rated LRGs in Argentina currently have a 'CCC+' long-term foreign currency rating on them. Their need to access dollars to make debt payments makes them especially vulnerable to strict foreign exchange controls, including their restricted capacity to accumulate reserves in dollars. Still, following the international debt restructuring of most Argentine LRGs (except for the City of Buenos Aires), the 2022 debt service in foreign currency will be low.

We believe that the key risks for Argentine LRGs in 2023 and 2024 are low liquidity and limited access to external funding. A pickup in debt service is expected as restructured foreign currency debt starts to mature in 2024 for most provinces. We view the LRGs' economic growth prospects as very weak based on per capita GDP and the pronounced sovereign economic imbalances. Still, we expect the City of Buenos Aires' relatively high income levels compared with those of domestic and international peers to translate into stronger economic and fiscal resilience.

We also expect public-sector wage increases and deferred infrastructure spending will force many Argentine LRGs to increase their expenditure, eroding fiscal margins over the next two years. We expect modest after-capital deficits in 2022-2024 following largely positive results in 2021, with a median balance after capital expenditure over 2020-2024 of negative 1.8% of total revenue.

Overall debt levels will remain moderate compared with global peers' over the same period and fall to a median of 24% of revenue in 2024, due largely to inflation dynamics and a lack of new debt financing. With 80% of LRG debt denominated in dollars, their debt and debt service profiles are vulnerable to the Argentine peso's depreciation.

We view the institutional framework in which Argentine municipalities and provinces operate as very volatile and underfunded. Economic instability and major economic policy shifts render long-term financial planning extremely difficult, at both the federal and local levels. The relationship between LRGs and the federal government, including via the federal fiscal framework, is characterized by frequent reforms and a short track record of compliance with fiscal discipline laws. Furthermore, LRGs' fiscal performance is linked to that of the nation, and a prolonged recession and very high inflation have contributed to structural imbalance at all levels.

Brazil

In Brazil, a pickup in inflation has caused a revenue windfall for LRGs since 2021 and a public payroll freeze during the pandemic left states with large cash reserves at the beginning of 2022. A tax rate cap in gasoline, cooking gas, and other essential goods is unlikely to affect revenue collection in 2022 because lower prices will drive higher consumption.

Meanwhile, rigid spending rules limit Brazilian states' budgetary flexibility, while pressure to raise payroll and infrastructure spending following the salary freeze will start to squeeze operating margins (see "Although Brazilian States Are Flush With Cash, Spending Pressures Are Mounting," published April 25, 2022). As a result, we expect average after-capital fiscal balances from 2020-2024 to soften to a median 2.1% of revenue from a median 2.9% in 2021 for entities we rate on the global scale. Restrictions on new borrowing will also result in lower debt levels compared with 2020, although we expect the five-year average of median debt to revenue will be relatively stable.

We rate three Brazilian LRGs on the global scale: the State of Alagoas (BB-/Stable/--; national scale: brAA+/Stable/--), State of Santa Catarina (B+/Positive/--; national scale: brAA/Positive/--), and Minas Gerais ('SD'). We rate the State of Paraiba at 'brAA+/Stable/--' on the Brazilian national scale. A rating of 'brAA+' could correspond to a global scale rating of either 'BB-' or 'B+' under our Guidance: Methodology for National and Regional Scale Credit Ratings."

Brazilian states and municipalities operate in an institutional framework that we consider volatile and unbalanced (see "Public Finance System Overview: Brazilian States and Municipalities," published Oct. 26, 2021). Although the laws governing the federal fiscal system are well-grounded and relatively stable, with transparent disclosure, the system's rigidity and complexity have left LRGs unable to address structural imbalances in their budgets. We believe that lack of progress on this front will translate into a structurally weak budgetary performance, low capital expenditure, and higher debt.

Primary Credit Analyst:Sarah Sullivant, Austin + 1 (415) 371 5051;
sarah.sullivant@spglobal.com
Secondary Contacts:Manuel Orozco, Sao Paulo + 55 11 3039 4819;
manuel.orozco@spglobal.com
Omar A De la Torre Ponce De Leon, Mexico City + 52 55 5081 2870;
omar.delatorre@spglobal.com

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