Background on the Financial Discipline Law (LDF)
Ten years after the implementation of the Financial Discipline Law for Federal Entities and Municipalities (LDF), credit ratings of Mexican states have shown improvements in debt sustainability, revenue collection, expense control, and liquidity. However, this positive trend is accompanied by stagnant public investment according to Fitch Ratings’ “Panorama of Mexican States: October 2025” report.
Credit Ratings Improvement
As of the first half of 2025, according to the Secretariat of Finance’s (SHCP) Debt Alert System, 31 out of 32 states with debt obligations are classified under the sustainable debt category, except for Tlaxcala which has no contracted debt.
In contrast, in the first public accounts report in 2016 when the LDF took effect, Hacienda classified 20 entities as having sustainable debt, 10 were under observation, and one was classified as high. This demonstrates the success in cleaning up local public finances and credit ratings.
In 2015, only 20% of the evaluated entities reached “AA(mex)” levels and even fewer attained the highest national rating, “AAA(mex)”. Now, this figure is close to 50%. Additionally, only Guerrero, Colima, Baja California Sur, and Michoacán are rated “BBB-(mex)”, while the “BB” rating and below have disappeared from the national map.
The rapid growth of subnational debt, in states and municipalities, once reached annual rates close to 25% before the LDF. Although the total debt continues to grow, exceeding 600,000 million pesos, the nominal variation remains minimal, as per the Fitch report.
If sustainable debt conditions persist by year-end, Fitch Ratings estimates an additional borrowing potential of 227,300 million pesos, assuming the maximum net financing ceiling of 15% of disposable income, equivalent to 0.67% of the Gross Domestic Product (GDP), which is 2.4 times greater than the credit potential in 2018.
Stagnant Public Investment
Despite greater fiscal space, state capital expenditure on public works, infrastructure, and development remains stagnant.
According to Fitch Ratings, the median Capital Expenditure (GC) remains below 10% of total spending, while operational expenses absorb over 90% of the budget—an insufficient threshold to stimulate local economic growth.
In recent years, investment has barely recovered pre-pandemic levels, “sustained mainly by improved operating margins rather than debt acquisition”; that is, states are using their surpluses to fund modest investments while public investment for productive purposes has stalled.
Macroeconomic Environment
The macroeconomic environment presents immediate challenges for state development, as national growth remains slow and concentrated in entities receiving greater federal investment.
While the Mexico-US relationship and the upcoming 2026 review of the Mexico-United States-Canada Agreement (T-MEC) add uncertainty regarding competitiveness, foreign direct investment, and employment.
Fitch Ratings highlights that the improvements in credit quality of subnational governments and expectations of lower interest rates present an opportunity to increase capital expenditure on infrastructure, security, transportation, water, sanitation, and tourism to boost state economic growth.
Among the most solvent states are Mexico City, Guanajuato, and Querétaro, which lead with “AAA(mex)” ratings, also showing stable outlooks and moderate debt levels relative to their income.
Key Questions and Answers
- What is the Financial Discipline Law (LDF)? The LDF, implemented in 2016, aims to improve the financial management and creditworthiness of Mexican states and municipalities.
- How have credit ratings of Mexican states improved? Credit ratings have shown significant improvement in debt sustainability, revenue collection, expense control, and liquidity since the LDF’s implementation.
- What is the current state of public investment in Mexican states? Despite better fiscal space, public investment for infrastructure and development remains stagnant.
- What challenges does the macroeconomic environment pose for state development? Slow national growth, concentration of federal investments in certain states, and uncertainties surrounding the Mexico-US relationship and T-MEC review create challenges for state development.
- What opportunities exist for Mexican states given their improved credit ratings? There is potential to increase capital expenditure on infrastructure, security, transportation, water, sanitation, and tourism to stimulate state economic growth.
