Introduction
Fitch Ratings, an international credit rating agency, has stated that the new reference interest rates for debts contracted by Mexican state and municipal governments starting in 2025 will help alleviate their debt burden. This prediction is based on a regulatory change implemented by the Banco de México (Banxico), which establishes the Tasa de Interés Interbancaria de Equilibrio a un día hábil bancario (TIIE de Fondeo) as the new benchmark.
Current Interest Rate Structure
As of December 31, 2024, existing bank loans will continue to be linked to the TIIE at 28 days (variable) plus an overlay according to the credit rating of the financing. For financings contracted from 2025 onwards, reference rates will be the TIIE de Fondeo at one day and its advanced 28-day composite version.
Historical TIIE Comparison
Over the past five years, Fitch Ratings notes that the TIIE de Fondeo (at one day and 28 days) has consistently been lower than the TIIE at 28 days, with differences exceeding 20 basis points. This situation could encourage states and municipalities to undertake debt refinancing and restructuring processes for their long-term financial obligations, incorporating the new reference rates into their existing credit contracts.
Positive Impact on Credit Ratings and Debt Structures
The benefits to the finances of states and municipalities, according to Fitch, will depend on two primary factors: market financial conditions and the entities’ ability to complete refinancing processes. The credit rating agency will continue to monitor these developments to assess their impact on the credit profiles of the entities and their debt structures.
Better Market Reflection
Fitch Ratings also considers that the new rates more accurately reflect current market conditions, as they are determined by observed transactions in the money market following Banxico’s published methodology. This change aligns them more closely with the target rate, ensuring a tighter relationship between the reference rates and Banxico’s policy objective.
Key Questions and Answers
- What is the regulatory change implemented by Banxico? Banxico has established the TIIE de Fondeo as the new reference rate for state and municipal government debts starting in 2025.
- How will this change impact existing debts? Existing bank loans will continue to be linked to the TIIE at 28 days plus an overlay, while new financings from 2025 onwards will use the TIIE de Fondeo at one day and its advanced 28-day composite version.
- What factors will determine the benefits for state and municipal finances? The benefits will depend on market financial conditions and the entities’ capacity to complete refinancing processes.
- How do the new rates reflect current market conditions? The new rates are determined by observed transactions in the money market, aligning them more closely with Banxico’s target rate and ensuring a better reflection of market conditions.
