Positive Impact of Interest Rate Reduction on State Debt
The reduction of the benchmark interest rate by the Bank of Mexico (Banxico), which began last year and is expected to continue through 2025, will benefit the management of debt in the states, as these financings are primarily conducted in local currency and mostly at variable rates. Unlike the federal government, which has 20% of its debt in foreign currency and mostly at fixed rates, state and municipal governments can take greater advantage of the rate cuts by Banxico, added Tamón Takahashi, chief economist at TKA Analytica, a center specialized in analysis and research.
On February 6, the Mexican central bank reduced the benchmark interest rate by 50 basis points, bringing it down to 9.50%, following a slowdown in inflation that reached its lowest level since February 2021. Inflation is expected to continue falling by the end of the year, potentially reaching 8%, according to estimates by the Ministry of Finance. “A great piece of news for the states is that the decrease in interest rates will be very beneficial since most of the financings are at variable rates. Recent refinancings have had a relatively low spread, which translates to more favorable cash flow for them,” commented Takahashi. Although inflation began to ease in February 2025, Banxico had already adjusted rates downward in March of last year and did so again in August and September. This trend is reflected in the weighted average rates of state debt, which have shown a decline by the end of September 2024 compared to the end of 2023. All state entities recorded decreases in their rates, except for Chiapas and Chihuahua, according to figures from the Ministry of Finance and Public Credit (SHCP). The five entities with the lowest rates are Colima, Mexico City, Coahuila, Veracruz, and Nuevo León, while the highest rates belong to Zacatecas, Durango, Baja California Sur, Guerrero, and Chihuahua. Additionally, the total debt of the states dropped from 617.008 billion pesos to 610.471 billion pesos between the end of 2023 and the third quarter of 2024, based on the latest data from the Ministry of Finance. The entities that reduced their debt the most are Mexico City, Guerrero, Sinaloa, Coahuila, and Tamaulipas. “Out of those more than 600 billion pesos, about 80% to 90% corresponds to variable rate debt; this means that every reduction in Banxico's rate by 25 to 50 basis points results in lower monthly interest payments for the states, an amount that can reach into the billions of pesos,” concluded the TKA Analytica specialist. However, Nuevo León, Chihuahua, Querétaro, the State of Mexico, and Guanajuato saw an increase in their debt amounts of up to 6 billion pesos, with only eight states increasing their financing during that period.
The reduction in interest rates can represent a significant opportunity for states, especially those with variable interest rates, as it allows them not only to save on interest payments but also to reinvest those resources in other areas of development. However, it is crucial that governments maintain a responsible management of their finances and evaluate the long-term implications of their debt, avoiding falling into cycles of indebtedness that could compromise their future economic stability.
