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Mexico’s budget shows conservative fiscal targets

December 18, 2018

The new government is committing to fiscal responsibility, but the implementation of the fiscal targets is challenging

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Mexico’s budget for next year features reasonable macroeconomic estimates and conservative fiscal targets. Main macroeconomic estimates are in line with market consensus. However, consensus GDP growth forecasts (which were recently revised due to increased uncertainty) are somewhat below the Ministry of Finance budget estimates. Also, oil price seems high (compared with current levels), but probably the previous administration has implemented hedges for the 2019 budget when the price was higher. As expected, the budget contains conservative targets. Nominal fiscal deficit (2.0% of GDP) is in line with what the previous administration (Enrique Peña Nieto) estimated for 2019, while the primary surplus for 2019 was increased to 1.0% (from previous estimate of 0.9%).

AMLO’s priority programs were included in the budget, but some estimates were revised down. AMLO priority programs were included with a total cost of 251 bn pesos (1.2 % of GDP) which seem low compared with what the government previously indicated and the number of programs. For example, pension for the elderly was estimated at 112 bn pesos (0.5% of GDP) compared to budget estimate of 100 bn pesos (0.4% of GDP). There was no explicit mention of the cancelation cost of the Texcoco airport in the document. However, it included resources for the modernization and rehabilitation of the airport and connectivity infrastructure. The budget included also a special economic zone in the northern frontier which implies a reduction of the VAT to 8% and a reduction of a third in the corporate and personal income tax. Finally, PEMEX budget was increased 14.1% in real terms (compared to last year’s approved budget) to accommodate more investment for oil exploration and production and the construction of a new refinery and rehabilitation of existing ones.

In all, the new government is committing to fiscal responsibility, but the implementation of the fiscal targets is challenging, given the many social and infrastructure promises of the administration and growing downside risks for activity (due to the slowdown of U.S. economy and uncertainties generated by AMLO’s policies). Moreover, there are not full details on how to achieve the promised fiscal savings, which are an important assumption to reach the targets. Looking forward, the Congress has until the 31st of December to approve the Budget, but it is expected to be approved before the 24th of December.


According to the Brazilian Central Bank, October’s IBC-BR Activity Index came in stable, in line with the median of market expectations. Relative to the same month in 2017, the index rose 3.0% (itaú: 2.5%; bbg: 2.4%). The mismatch between mom/sa and yoy results versus expectations came due to upward revisions to the nsa index since June/2018, probably to take into account the latest GDP quarterly series.

The stability shown since September was possibly driven by tighter financial conditions in 3Q18. Another factor to explain it is the normalization of retails sales following August, when sales were temporarily boosted by withdrawals from accounts held under PIS/PASEP employer contribution programs. Looking forward, we expect improved financial conditions and gains in the labor market to lift the growth pace.

According to the Focus survey, the IPCA inflation expectations remained at 3.71% for 2018, 4.07% for 2019 and 4.00% for 2020. The median GDP growth expectations did not change for 2018 (1.30%) and 2020 (2.50%), while it has increased 2 bps for 2019 to 2.55%. The year-end Selic rate remained stable for 2019 and 2020, at 7.50% and 8.00%, respectively. Median forecasts for the exchange rate depreciated to BRL 3.83/USD for 2018 (from 3.78), and remained flat at BRL 3.80/USD for both 2019 and 2020.

The Copom minutes was just released; we will publish a report on the central bank’s document today.


In a positive development for Colombia, rating’s agency Standard and Poors reaffirmed the country’s foreign currency rating at ‘BBB-‘ with a stable outlook. The agency also reaffirmed the rating of local currency sovereign debt (BBB) as well as short-term foreign and domestic currency ratings (‘A-3’ and ‘A-2’, respectively). The stable outlook reflects the rater’s expectation of a gradual strengthening of Colombia’s fiscal and external profiles and is considers as a baseline scenario the administration will not comply with the fiscal deficit target (2.4% of GDP for 2019). The brief explaining the decision highlights Colombia’s established political and economic institutions which have contribute to prudent macroeconomic management. Also, and despite global headwinds and domestic challenges (peace accord implementation, costs related to Venezuelan immigration), S&P expects growth to remain in line with its peers (2.9% on average during 2018-2021). In this context lower deficits (2.1% average for 2018-2021) are expected, partly based on the assumption the financing law gets approved before yearend. The rater expects the administration to pursue significant reforms that would strengthen policy framework, including pension, health and education reform, in a fiscally prudent matter. Overall, the decision likely brings relief to the administration, as a watered-down of the needed financing law (tax reform) makes its way through congress.

Consumer confidence in November registered the lowest level since March 2017 and the lowest November recording on record amid the advancement of tax reform plans that initially (before revisions) planned to raise VAT on the sale of food staples. Think-tank Fedesarrollo’s consumer sentiment index came in at -19.6 percentage, a significant fall from -10.0pp in November last year (-1.3 points in the previous month). The retreat from November 2017 was mainly explained by consumers’ one year expectations dropping 14.7pp to -23.7pp. The sub-index related to economic conditions continued in negative territory at -13.5 percent from -11.4 percent in November 2017 (-9.2 percent in October), dragged down by a worsening of how households’ view their economic performance versus one year ago. With the update that the tax reform would not be as harsh on consumers as initially thought, confidence may recover in coming months (particularly as inflation stays low and monetary policy remains expansionary), aiding activity recovery next year. Yet, lower oil prices remain a headwind. We forecast 3.3% growth for 2019 (2.6% in 2018).

According to the central bank’s monthly survey, inflation would likely end 2018 at 3.20%, down from the 3.30% previously expected and in line with Itaú’s forecast. The 1-year horizon inflation outlook remained broadly stable at 3.48% (3.50% in November), while the 2-year horizon inflation expectation moved to 3.20% (3.26% previously). Expectations for core inflation measures (excluding food prices) drooped to 3.31% for a 1-year horizon from 3.49% last month, while for the 2-year horizon also fell to 3.13% 3.26%, edging closer to Central Bank’s 3.0% target. Meanwhile, analysts believe a gradual normalization cycle will begin in April next year (delayed by one month vs. the November survey), while a second hike to 4.75% is still expected for June. We expect the board of the Central Bank to keep the policy rate unchanged at 4.25% at its Friday meeting. Controlled inflation, improving inflation expectations, a risky external environment and diminishing short-term upside inflation risks from fiscal policy (VAT hikes) and El Niño all point to stable rates in the near term. For 2019 we expect two hikes bringing rates to 4.75%. 

Day ahead: The central bank will publish the trade balance for the month of October at 1:00 PM. We expect a trade deficit of USD 1,228 million in October (USD -489 million last year), driven by rising imports (industrial and transport).


Day ahead: The GDP figures for 3Q18 will see the light at 5:00 PM. We expect a 3.5% year-over-year drop, in line with the official monthly GDP proxy (EMAE). In addition to that, the INDEC will publish the labor market indicators for 3Q18. We expect the labor market to show a new deterioration on a year-over-year basis (unemployment rate in 3Q17 was 8.3%), in line with the contraction in economic activity.

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