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					Evolution of Municipal
  Finance in Mexico

         Nathaniel Jackson,
 Multilateral Investment Fund (MIF)


           June 4, 2004


                 1
           Mexico’s trend towards
           greater decentralization


   Prior to 1998                  Post 2001




Highly centralized             More local
tax collection                 taxation

Dependence of                  Local
sub-nationals on               governments
federal funds                  can borrow
                               through markets

                       2
Mexico’s centralized revenue collection (1998)


 Government Level     Percent of     Percent of
                        GDP            Total
National                   10.5%        95.2%
State                      0.4%         3.5%
Municipal                  0.1%         1.3%
Total sub-sovereign        0.5%         4.8%
Total tax revenue          11.0%       100.0%


                                   Source: ECLAC
                       3
   International comparison of tax revenues


   Country      Central Level       Local Level
Mexico              94.7%               5.3%
Brazil              71.4%              28.6%
United States       66.3%              33.7%
Switzerland         64.5%              35.5%
Argentina           60.0%              40.0%
Canada              50.0%              50.0%

                Source: State Government of Nuevo León
                         4
          Source of Funding for Sub-Sovereigns
                      Prior to 1998

   Before decentralization, sub-sovereigns (states
    and municipalities) in Mexico were dependent on
    federal government funding and/or guarantees

   Prior to 1998:

       States derived 91% of financing from federal
        government

       Municipalities derived 71% of financing from
        federal government

                            5
  Sub-sovereign funding patterns in past


Prior to the reforms of 1998 to 2001:
• Transfers from National Fiscal Coordination
System (SNCF)
• Government bank (Banobras) lent directly to
states and municipalities
• SHCP executed guarantees on behalf of states
and municipalities so that they could borrow
from private sector banks
• Banks’ perception of risk: federal government
• Expensive interest rates vis-à-vis federal debt
                       6
             New laws encouraged
          decentralization of financing

• 1998: Ramo 33 transferred more money to sub-
sovereigns

• 2000: PAFEF created to allow states more access to
resources

• 2001: new Securities Market Law. Art. 14 established
the right of states and municipalities to issue
Certificados Bursátiles

• Article 115 of Constitution amended to allow for
more local management of treasury functions
                          7
        Benefits of decentralization of
         financing for governments


• More local independence and responsibilities

• Greater efficiency of matching funding and
  expenditures

• Market discipline of budgets

• Reduction of national government contingent debt


                         8
        Benefits of decentralization of
           financing for investors



• Greater transparency of financial information

• Differentiation of debt among sub-sovereign
  borrowers


• More long-term instruments available


• Deepening of local capital market


                         9
         Market conditions encourage
            fixed income issuance



• Substantial decrease in inflation

• Low level of expected inflation for coming years

• Reduction in short term interest rates over the
  last few years




                         10
        Accelerated growth of local
     institutional investors and funds


From 2000 to 2003:


• Institutional investment grew an average of 74.4
  billion pesos per year


• Private debt funds grew an average of 51.7 billion
  pesos per year


                         Source: Banco de México

                         11
      Local institutional investors and
    funds prefer government securities


This growth is particularly significant because:


• Institutional investors have 84% of investments in
  government bonds


• Private debt funds have 79% of investments in
  government bonds


                               Source: Banco de México



                          12
       Factors driving issuance of
       sub-sovereign instruments


Decentralization
reforms                     States and
                            Municipalities
                            issue
Propitious market           Certificados
conditions                  Bursátiles to
                            local
                            investors
Increased
demand for local
investments
                    13
        Growth of Sub-sovereign bond issuance


          Issuance of Certificados Bursátiles
                 Nov. 2001- December 2003
    Entities       Number      Amount issued     Amount issued
                   of issues    in millions of    in millions of
                                    pesos             UDIs
Municipalities        8             1,465              96
States                13            5,366            2,500
Distrito Federal      1             2,500              0
Total                 22            9,331            2,596

                                      Source: Protego Asesores

                               14
         Characteristics of Certificados
            Bursátiles since 2001:

● Highly rated: 73% rated Mx.AAA, the remainder
  rated Mx.AA- or above

● 60% floating, 40% fixed rates

● Floating rates based on spread over CETES

● Fixed: mostly UDI denominated, 10 years or more

● Mostly balloon payments


                          15
               Sub-sovereign structured
                 finance deals in 2003


 Securitized      Entities        Number       Issue Amount
   flows                          of issues

Federal           2 states            5       US$392 million
Revenues          2 munis
Payroll tax       2 states            2       US$132 million



                                     Source: Fitch Ratings


                             16
     IDB efforts to encourage
       local public finance


FORTEM Phase I (2001)
• made loans available via Banobras to the
municipalities of Tlaquepaque and Urapan
upon completion of reforms
• institutional streamlining of Banobras

FORTEM Phase II (2004)
• more rapid disbursements
• more competitive rates

                  17
       Future IDB efforts to encourage
          sub-sovereign issuance

Promote the adoption of “right” fiscal and budget
incentives at local level:
• Discourage national government “bailouts” of
local borrowers

• All decentralization projects should be fiscally
neutral

• Local debt should be issued primarily for capital
expenditures

• Increased local tax authority
                         18

				
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