The Sustainability of Mexico Subnational Debt

Abstract

After the costly bailout of subnational public finances in 1995, the Mexican central government began a process of fiscal decentralization aimed to prevent unsustainable debt levels and further subnational bailouts. Despite the efforts, between 1996 and 2016, subnational debt grew ten times in nominal terms. As a response, the Ley de Disciplina Financiera de las Entidades Federativas y los Municipios (hencefort LDF) was enacted in 2016. The LDF included a new fiscal rule intended to discipline subnational governments. The purpose of this dissertation is two-fold. First, it provides an assessment of Mexican states' and municipalities' debts from 1993 to 2017, paying particular attention to the effects of the 2008-09 global financial crisis. Second, it evaluates the effectiveness of the new fiscal rule encoded in the LDF.