Background on Morelia and its Relevance
Morelia, the capital city of the Mexican state of Michoacán, has recently experienced a downgrade in its credit rating by the international credit rating agency Fitch Ratings. This development is significant as it reflects the city’s financial challenges and potential risks for investors and stakeholders. Morelia, known for its rich history and cultural significance, is an important municipality in Michoacán, which has faced various economic and social hurdles in recent years.
Fitch Ratings’ Evaluation and Key Concerns
Structural Spending: Fitch highlighted that Morelia’s spending structure is bloated, with 81% of its budget allocated to fixed costs such as salaries and services that cannot be easily cut. Only 19% of the budget is dedicated to public works, which heavily relies on debt and federal support.
Liquidity Position: The municipality’s liquidity has reached historically low levels due to a decrease in available cash. Morelia has continued the practice of leveraging with suppliers and contractors, increasing its short-term liabilities.
Limited Financial Maneuverability: With insufficient cash, Morelia cannot receive emergency support from higher levels of government and must resort to further borrowing from commercial banks. However, the Law of Financial Discipline (LDF), enacted in 2016, restricts the municipality from exceeding 6% of its total income in such borrowings.
Short-term Debt Reliance: Fitch noted that Morelia has intensively relied on short-term financial credits, nearing the maximum limit set by the LDF’s framework for short- and long-term borrowing.
Impact on Morelia’s Debt and Financial Health
As a result of the increased short-term obligations, Morelia’s debt evaluation under the Secretariat of Finance and Public Credit’s Alert System deteriorated to “debt under observation.” By June 30, 2025, Morelia’s direct debt stood at 256.1 million pesos, consisting of two short-term loans totaling 144.5 million pesos from Banca Afirme, S.A., and a loan from Banco Nacional de Obras y Servicios Públicos S.N.C. (Banobras) under the Banobras-Fais scheme, affecting 25% of its share from the Social Infrastructure Fund (FAIS).
Federal Transfers and Local Revenue Generation
Reliance on Federal Transfers: According to Fitch, federal transfers accounted for 62.7% of Morelia’s income on average between 2020 and 2024. Although federal contributions remain stable, the city has limited local revenue collection capabilities and restricted fiscal autonomy.
Vulnerability to Federal Income Fluctuations: Should federal contributions decline, Morelia would have few options to compensate due to limited average household income and the necessity of local tax or right increases, which require approval from the local Congress.
Predial Tax Revenue Improvement: Although the current administration has improved predial tax collection, Fitch considers this progress moderate and insufficient to alter Morelia’s structural dependence on federal funds.
Key Questions and Answers
- What led to Morelia’s credit rating downgrade? Fitch Ratings cited structural spending, low liquidity, limited financial maneuverability, and excessive reliance on short-term debt as key factors.
- How does Morelia’s financial situation impact its ability to manage emergencies? Due to insufficient cash reserves and limited fiscal autonomy, Morelia must borrow more from commercial banks to address emergencies.
- What percentage of Morelia’s income comes from federal transfers? Federal transfers account for approximately 62.7% of Morelia’s income on average between 2020 and 2024.
- How has Morelia’s predial tax revenue changed under the current administration? The current administration has made progress in improving predial tax collection, though Fitch considers this improvement moderate and insufficient to reduce Morelia’s reliance on federal funds.
