A protracted and sustained decrease in the price of the Mexican crude oil mix could affect the size of the Federal Revenue Sharing (FRS) scheme and the federal transfers distributed to the states and municipalities in Mexico, according to Fitch Ratings.
However, the expected impact of lower oil prices in 2015 would be quite different from that of 2009 mainly because the national and international economic contexts have changed considerably.
The Federal Entities Revenue Stabilization Fund (FEIEF) guarantees that, in adverse situations, subnationals receive compensation, up to a certain level, for lesser funds from the FRS relative to the Federal Revenue Law estimates. In 2009, when the FEIEF's outstanding balance was insufficient, the federal government structured loans to local governments that were backed by FEIEF's future flows in tandem with the issuance of zero coupon bonds to guarantee the principal. Therefore, the government achieved a 5.6% reduction in the FRS scheme compared with 14.3% without FEIEF, in real terms.
A temporary decrease in the price of the Mexican crude oil mix would not pressure the Issuer Default Ratings of subnational entities currently rated by Fitch Ratings. Nonetheless, the agency expects local governments to be prudent in planning and executing their 2015 budgets, given the uncertainty in the oil market. In particular, during the first half of 2015, since midterm elections might pressure public expenditures.
With regards to the creditworthiness of local government's loans and issues rated by Fitch, it is worth emphasizing that historically the funds that service the debt of those loans have not been affected by a decrease in the FRS funds. During 2009, Fitch noted that the debt service coverage ratio of loans backed with federal transfers were stable. Therefore, the ratings agency expects that these credit structures would not be affected by a decline in this flow, if a similar scenario arose.
The USD1 decrease in the Mexican crude oil mix price projected in the Economic Package for 2015 is associated with an average reduction of 0.37% in the FRS, based on the modifications included in the draft LIF for 2015, assuming a constant exchange rate and daily oil production of about 2.4 million barrels.
The report 'Subnational Finances Protected by FEIEF' is available at www.fitchratings.com or by clicking on the link above.
Additional information is available on 'www.fitchratings.com'.
Applicable Criteria and Related Research: Subnational Finances Protected by FEIEF
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=845748
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