Itaú BBA - MEXICO – Fiscal accounts deteriorated in 1H20, despite austerity

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MEXICO – Fiscal accounts deteriorated in 1H20, despite austerity

July 31, 2020

The MoF reduced its 2020 GDP forecast to -7.4%

On a 12-month rolling basis, the main measures fiscal balances deteriorated in June. Using 12-month rolling figures, the nominal fiscal deficit deteriorated to 2.3% of GDP in June (from a deficit of 1.6% in 2019). The Public Sector Borrowing Requirements (PSBR), the broadest measure of fiscal balance, posted a deficit of 3.5% of GDP in June (from a deficit of 2.4% of GDP in 2019), while primary surplus stood at 0.4% of GDP (from a surplus of 1.1% in 2019).

Lower fiscal revenues as of June. Total fiscal revenues fell by 3.7% YoY in real terms during the first half of the year, dragged mainly by oil revenues which contracted 41.3%. 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 payment is registered until the end of the year). In turn, tax revenues (excluding gasoline excise tax) stood resilient, growing 0.5% YoY YTD in real terms. While VAT revenues fell by 0.6% YoY YTD in real terms amid weak economic activity, income tax revenues surprised increasing 1.3% due to improved enforcement measures to collect taxes. Gasoline excise tax revenues fell by 4.1% YoY reflecting lower gasoline sales amid distancing measures. Finally, non-tax revenues increased sharply (65.2% YoY YTD in real terms) as the MoF recovered several assets (trust funds) that were spread across different entities of the administration.

Expenditure increased pressured mainly by a favorable base effect (last year´s government transition). Total fiscal expenditure expanded 2.1% YoY as of June in real terms, pressured mainly by an increase in fixed capital expenditure (16.0%). Still, total expenditure was below the expected execution as of June in MXN 161 billion. In turn, total fiscal expenditure without non-avoidable expenditure items (financial cost, non-earmarked transfers and pensions) and ex-capital expenditure decreased 0.9% YoY YTD in real terms.  Finally, financial cost increased 0.4% YoY YTD in real terms.  

Public debt increased as of the 1H20. The historical balance of public sector borrowing requirements, the broadest measure of public debt stood at 52.1% of GDP, while the net debt stood at 53.2% of GDP (from 44.8% and 45.5% in 2019, respectively).

The GDP growth macro forecast of the government was updated, reflecting more closely the effect from the COVID-19 crisis, but still better than market consensus.  The MoF now expects a 2020 GDP growth of -7.4% (compared to the last estimate of -2.9% and market consensus of -9.6%), while their 2020 average oil price estimate was revised to USD 34.4 per barrel (from USD 24 per barrel). As a result of these main changes, the MoF’s estimates of the nominal and primary fiscal balance deteriorated to -4.0% of GDP (before: -3.3% of GDP) and -0.6% of GDP (before: -0.4% of GDP), respectively. We note that these estimates already include the use of resources from the stabilization fund and expected payment from the oil hedge. Likewise, higher debt is expected:  the historical balance of public sector borrowing requirements is expected at 55.4% of GDP (before 52.1% of GDP) by the end of the year, while net debt is expected at 54.8% of GDP (before: 52.8%). 

We expect fiscal accounts to deteriorate due to the effect in the economy from COVID-19 and despite a modest fiscal stimulus. We expect lower tax revenues due to weak economic activity and a fall in gasoline excise tax revenues due to lower gasoline sales amid distancing measures. Moreover, while the effect of lower oil revenues from the fall in oil prices will be mitigated by the oil hedge, lower oil production will also affect them. We now expect the nominal fiscal deficit and net public debt to reach 4.5% of GDP (before: 4.3% of GDP) and 59.2% of GDP (before: 57.2% of GDP) this year, respectively.

Julio Ruiz


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