Itaú BBA - MEXICO – Broadly stable fiscal balances as of the 3Q20

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MEXICO – Broadly stable fiscal balances as of the 3Q20

October 30, 2020

The MoF deteriorated slightly their fiscal balance estimates for 2020

On a 12-month rolling basis, fiscal balances were broadly stable. Using 12-month rolling figures, the nominal fiscal deficit stood at 2.4% of GDP in September (practically unchanged from June and from a deficit of 1.6% in 2019). The Public Sector Borrowing Requirements (PSBR), the broadest measure of fiscal balance, posted a deficit of 4.1% of GDP in September (from a deficit of 3.6% of GDP in June  and a deficit of 2.3% of GDP in 2019), while primary surplus stood at 0.6% of GDP (from a surplus 0.4% of GDP in June and a surplus of 1.1% in 2019).

Weak fiscal revenues reflect weakness in economic activity and lower oil revenues, which were partially offset by the use of the rainy-day fund. Total fiscal revenues fell by 5.4% YoY in real terms as of the 3Q20, dragged mainly by oil revenues which contracted 45.7%. Lower oil revenues were the result of lower oil prices and production (the MoF has an oil hedge to mitigate the impact from lower oil prices, but the full payment is registered until the end of the year). In turn, tax revenues (excluding gasoline excise tax) fell by 0.9% YoY YTD in real terms, dragged by VAT revenues (-2.0%) but supported by the resilience in income tax revenues (0.1%).  We note the resilience in income tax revenues is associated to an aggressive tax collection strategy to large corporations.  Finally, non-tax revenues increased sharply (76.4% YoY YTD in real terms) as the MoF recovered several assets (trust funds) that were spread across different entities of the administration and the use of the rainy-day fund (balance now stands at 0.3% of GDP).

Lower fiscal expenditure reflects a shy fiscal stimulus and austerity measures. Total fiscal expenditure fell by 2.1% YoY as of the 3Q20 in real terms, remaining below the expected execution as of 3Q20 in MXN 309 billion. In turn, total fiscal expenditure without non-avoidable expenditure items (financial cost, non-earmarked transfers and pensions) and ex-capital expenditure decreased 1.3% YoY YTD in real terms.  Finally, financial cost increased 1.4% YoY YTD in real terms. 

Public debt increased as of 3Q20 mainly due to the lower GDP base. The historical balance of public sector borrowing requirements, the broadest measure of public debt stood at 52.7% of GDP, while the net debt stood at 53.2% of GDP (from 44.8% and 45.5% in 2019, respectively).

The MoF expects a slightly deteriorated nominal and primary fiscal balance for 2020, reflecting in part a more appreciated currency expectation by the MoF which has a negative sensibility to revenues.  MoF’s nominal and primary fiscal balance estimate for 2020 stood at -3.0% of GDP (before: -2.9% of GDP) and +0.1% of GDP (before: +0.2% of GDP), respectively. While their 2020 macro assumptions for GDP growth (-8.0%), oil production (1.74 million barrels a day) and oil price (34.6 USD per barrel) remained unchanged compared to the ones published in the 2021 budget, the currency is now expected at 19.9 pesos to the dollar (before: 22 pesos to the dollar). 

We expect slightly worse fiscal account balances for 2020 (nominal fiscal deficit of 3.6% of GDP and a primary deficit of 0.3% of GDP) than those of the MoF, given a more conservative oil production assumption and a larger fall in GDP.  Next year the administration plans to continue betting on solid fiscal accounts with a 0.0% of GDP primary balance. While the risk of a fiscal slippage will continue to be present amid MoF’s still optimistic macro assumptions, Banxico’s profit from managing the international reserves (could reach as much as 1% of GDP), which will be transferred next year to the treasury, will help to mitigate upside pressure in fiscal accounts. 

Julio Ruiz

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