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 February 1, 2016 - 9:41 AM EST
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Fitch: Oil Drop Will Hurt Mexican Locals Less Than 2009 Bust

The recent decline in oil prices will have a smaller impact on Mexican federal transfers to states and local governments than in the past, Fitch Ratings says. Structural changes to the federal funding sources have evolved since the 2009 financial crisis. However, lower tax revenues coinciding with weaker oil revenues could pressure some state and local budgets.

The amount of General Sharing Fund (GSF) transfers from the federal government to the states in the current fiscal year is forecast at approximately MXN489.8 trillion. GSF makes up almost three quarters of federal transfers, called Participaciones, to local and state governments. These transfers are the main non-earmarked revenue source for states and locals and they are most often used to service long-term debts.

Federal law requires the GSF transfers to be set at 20% of the value of Federal Revenue Shares (FRS). FRS is funded by tax and oil revenues from the federal government. Under the current federal budget forecast, which uses a USD50 per barrel (pb) oil price, FRS would transfer MXN2.4 trillion to state and local governments. However, the price of oil is sliding well below those forecasts. According to the Energy Information System, Mexican crude oil's average price per barrel fell to nearly USD20 in mid-January. A similar decline in oil prices preceded the 2009 economic crisis. From 2008 to 2009, the annual average oil price fell from USD84.4pb to USD57.4pb.

Assuming oil prices don't decline below that level and tax revenues are flat, Fitch expects the amount of GSF transfers to the states and locals to decline by 4.7% from 2015 level (or 8.9% below budget). From 2008 to 2009, GSF transferred 15.7% less from the federal government to states and locals.

GSF could be substantially affected if the fall in oil prices is accompanied by a decline in tax revenues. This could require the activation of the States Revenues Stabilization Fund, which backfills the gap between budget and actual revenues. In September 2015, its total was MXN35 billion.

The funding sources behind FRS have been changed so that it relies less on oil revenues and more on taxes. In 2008, oil revenues accounted for 44% of the FRS, while in 2015 that share dropped to 12.7%.

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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Manuel Kinto Reyes
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Source: Business Wire (February 1, 2016 - 9:41 AM EST)

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