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Local And Regional Government Outlook 2025: Funding Needs And Capex In Emerging Markets Will Mean More Borrowing

This report does not constitute a rating action.

We expect that the amount of debt issued by local and regional governments (LRGs) in emerging markets will continue to grow over the next two years despite these governments running operating surpluses to help fund capital expenditures and amortization. Chinese and Indian LRGs dominate LRG borrowing in emerging markets (EMs), accounting for 97% of the total. LRG borrowing in Latin American EMs is in a distant third place.

For our in-depth analysis on this topic, see Subnational Government Outlook 2025: Emerging Markets' Borrowing Will Rise On Funding Needs And Capex, Jan. 16, 2025, on RatingsDirect.

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What's Happening

We project that gross borrowing by EM LRGs globally will hit a new peak of US$1.5 trillion in 2025, with Chinese LRGs accounting for US$1.3 trillion of that amount. Most of that borrowing by Chinese LRGs reflects their issuance of special-purpose bonds, as those LRGs conduct debt swap transactions to bring hidden debt onto official balance sheets.

Pre-pandemic borrowing seems further away for most EM LRGs. Outside of China and India, we expect EM LRGs' gross and net borrowing to remain mostly flat, with EM LRGs in Latin America--that is, LRGs in Brazil, Argentina, and Mexico--being the most indebted. Following them will be EM LRGs in EMEA--primarily African EM LRGs--and EM LRGs in the Asia-Pacific.

Why It Matters

Outside of China and India, we expect EM LRG debt to be 35% of operating revenue, on average, in 2024-2026. This is compared with the expected averages in that time frame for Chinese LRG debt (over 200% of operating revenue) and Indian LRG debt (160% of operating revenue).

Lower debt burdens at many EM LRGs compared with the debt burdens at their developed-market counterparts reflect weaker institutionality, weaker financial management, small local markets, and limits on market access. EM LRGs tend to run larger operating surpluses to help finance capex and amortization. That said, large after-capex deficits at EM LRGs are largely driven by LRGs in China and India. Elsewhere, many balances after capex that are close to zero reflect unmet investment needs.

At EM LRGs, debt is predominantly in domestic currency, often following local regulatory restrictions.

What Comes Next

EM LRG borrowing overall will trend upward, driven by Chinese and Indian LRGs, while borrowing by other EM and frontier-market LRGs should moderate. Among EM LRGs, those in Latin America are the next-largest borrowers in U.S. dollar terms. While Brazilian LRGs' debt burdens remain high given the indexed composition of their legacy debt with the central government, they don’t tap the markets. Mexican LRGs' borrowing is in the form of domestic currency bank loans.

Argentine LRGs are among the few EM LRGs globally that aim to borrow in the global capital markets, and do so in U.S. dollars. A key question in the next several years is whether or not they'll gain market access to repay forthcoming amortizations.

We expect the 2024 reform in Poland and the new EU cycle to support additional borrowing capacity for Polish LRGs as they take on local currency bank loans.

Related Research

Primary Contacts:Lisa M Schineller, PhD, New York 1-212-438-7352;
lisa.schineller@spglobal.com
Alina Czerniawski, Buenos Aires 54-1148912194;
alina.czerniawski@spglobal.com

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