Latin American Local Governments Face Financial Strains Despite Sovereign Aid

• Latin American sovereigns provided financial assistance to local and regional governments (LRGs) in 2020 through extraordinary transfers, debt relief measures, and additional loans to diminish the pandemic's harsh impact. 
• Brazil's substantial support prevented COVID-19 from squeezing local budgets; while aid to LRGs in Mexico and Argentina only mitigated fiscal erosion in 2020. 
• The subnational governments' finances could be pressured this year, as central governments shift away from propping LRGs' finances and towards fiscal correction and economic recovery, while the pandemic continues to take a severe toll on the region. 
• Meanwhile, limited financing sources will continue to constrain Latin American LRGs' fiscal room to maneuver through economic shocks. While the impact from the public health crisis on Latin American local government budgets has been less severe than initially expected, S&P believes that fiscal pressure is likely to mount this year. As central governments curb fiscal support for LRGs, their credit quality will depend on the economic recovery's trajectory, as well as on their financial performance. GDP of Mexico and Argentina will likely return to the pre-pandemic levels only by the fourth quarter of 2022 and even in 2023. Moreover, spending pressures remain because the region is still severely affected by the pandemic given the slow vaccine rollout.

(Source: S&P)