Itaú BBA - MEXICO – 2021 Budget: betting on responsible public finances, but risks remain

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MEXICO – 2021 Budget: betting on responsible public finances, but risks remain

September 9, 2020

Optimistic oil production targets and GDP growth estimates risks missing fiscal targets

The Ministry of Finance (MoF) sent the 2021 Budget proposal to Congress, narrowing the fiscal balance deficit targets.  The nominal and primary fiscal balances for 2021 were set at -2.9% of GDP (compared to previous MoF estimate of -3.6% of GDP) and 0.0% of GDP (from -0.6% of GDP), respectively. In turn, the Public Sector Borrowing Requirements (PSBR), the broadest measure of fiscal deficit is estimated at 3.4% of GDP (from the previous estimate a deficit of 4.0% of GDP). The narrowing of the fiscal balances is supported by an improvement in oil revenues amid a recovery in oil prices, according to the budget. 

The fiscal balances for 2020 were also updated to the upside. The primary fiscal balance target for 2020 was set at 0.2% of GDP (an improvement from previous MoF estimate of -0.6% of GDP), while the nominal fiscal and the PSBR deficits narrowed to 2.9% of GDP (from 3.7% of GDP) and to 4.7% of GDP  (from 5.4% of GDP), respectively. According to the MoF, the improvement in the fiscal balances for 2020 is supported by lower expenditures and higher tax revenues, despite weaker economic outlook (-8.0%, compared to previous estimate of  -7.4%), amid better than expected YTD tax collection. We note that the 2020 fiscal estimate includes resources from the rainy-day fund, oil hedge and recovery of assets (trust funds) that were spread across different entities of the administration. 

However, the risk of missing the fiscal goals is present amid still optimistic oil production targets and GDP growth estimates. For 2020, the estimated COVID-19 shock in the economy (GDP of -8.0%) is underestimated relative to market consensus (-9.9% in the most recent Citi-Banamex survey). Next year, the MoF estimates a GDP growth of 4.6% also above market consensus of 3.5%. Moreover, while the budgeted oil price for 2021 (42.1 USD per Barrel) seems to be aligned with current market conditions, the oil production target is still on the optimistic side (1,857 thousand barrels a day in 2021, from 1,744 tbd in 2020 and compared to their last estimate of 2,027 tbd). We note there are still no details of the oil price hedge.


AMLO’s priority programs are still considered in the 2021 Budget. Total resources for AMLO’s priority programs amount to around 1.8% of GDP, with allotted resources for the Mayan train and the new airport at 0.2% of GDP and 0.1% of GDP, respectively. Moreover, the 2021 budget includes a capital transfer to PEMEX in an amount of 0.2% of GDP (MXN 45 billion) to ​​​​​strengthen its financial position and continue with the construction of the refinery. 

The economic package includes changes to the gasoline excise tax mechanism which will likely smooth the effect from international energy prices on domestic gasoline prices, but with possible additional upside pressure on inflation next year. The revenue law initiative includes a supplementary excise tax to gasoline prices which would be added to the regular excise tax if their definition of base gasoline price (average wholesale gasoline price per liter in November 30, 2018 updated by inflation) is above the current gasoline reference price in pesos per liter (estimated using a reference benchmark, margins, distributions costs, among others). On the other hand, if the base gasoline price is below the gasoline reference price, the supplementary excise tax would be subtracted to the regular excise tax. The supplementary excise tax would be determined as the absolute difference between the base gasoline price and reference gasoline price, and would be published each week before implementation. Given that the current average of domestic regular gasoline prices is around 18.7 pesos per liter, which is below the level observed back in November 30 of 2018 of 19.32 pesos per liter, the odds of a supplementary excise tax at the beginning of next year (if the initiative is approved and gasoline prices stay around the same level) is high.

Higher public debt for 2020 and 2021Net debt for 2020 and 2021 is estimated at 53.6% of GDP (from 45.5% of GDP in 2019) and 52.4% of GDP, respectively.   

In all, AMLO’s administration is betting again on committing with responsible public finances, but the odds of missing their fiscal targets is present amid optimistic macro assumptions and expenditure promises. On the benign side, while fiscal buffers will be almost depleted this year, next year the MoF will receive resources from Banxico’s management reserves profit which will help to strengthen the fiscal position (estimated between 0.6-1.0% of GDP by the MoF). Regarding the approval of the 2021 Budget, we don’t expect mayor problems, as AMLO’s coalition holds at least a simple majority in both chambers of congress.

Julio Ruiz


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