Itaú BBA - MEXICO - Fiscal accounts improved further in January

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MEXICO - Fiscal accounts improved further in January

March 3, 2017

Oil revenues increased significantly, supported by higher prices and peso depreciation

Nominal fiscal deficit indicators narrowed in January on the back of a significant increase of oil revenues. The rolling 12-month public sector borrowing requirements (the broadest measure of the fiscal deficit) narrowed to MXN 544.5 billion in January 2017 from MXN 556.6 billion in December 2016 (2.9% of GDP), with the public deficit moving to MXN 485.1 billion (from MXN 503.7 billion, 2.6% of GDP) and the primary balance posting a MXN 12.8 billion surplus (from a 24 billion deficit, -0.1% of GDP) during the same period. It is worth clarifying that in order the calculate the PSBR, the Mexican government makes some adjustments to the public deficit; specifically, the accounting of extraordinary profit/losses from financial operations of the public sector, the net profit of development banks, the net profit of the insurance security deposit (IPAB), and infrastructure investment with deferred financing (PIDIREGAS).  

Revenues grew at a faster pace than expenditures. Oil revenues expanded at a strong 30.3% year-over-year in January, as the increase of oil export prices (49.1% year-over-year) and exchange rate depreciation (which increases the local currency value of oil revenues) more than offset the fall of oil output (10.5% year-over-year). Non-oil revenues, in contrast, grew at a modest 2% year-over-year. Tax revenues barely grew, supported by income tax collections (7%) but dented by a fall in the VAT (-7.1% year-over-year) and the excise tax (IEPS, -10% year-over-year, which is mostly levied on gasoline). On the spending side, net expenditures (that is net from double counting) grew 1.6% year-over-year, while primary spending fell by 3% year-over-year. Tellingly, interest expenditures soared 54.1% year-over-year, as peso depreciation and higher domestic rates added to the interest burden.        

However, public debt remains high. The gross and net debts of the public sector increased to MXN 10,131 (from MXN 9,934 billion, 51.2% of GDP ) and MXN 9,817 billion (from MXN 9,693 billion, 50% of GDP) between January and December, respectively. According to the fiscal consolidation plan, the government is looking to stabilize the public-debt-to-GDP ratio this year, after nine consecutive years of increases.

In our view, it is likely that the Mexican government will meet its fiscal targets for 2017, potentially preventing a rating downgrade. The government is targeting a primary surplus of 0.4% of GDP and public-sector borrowing requirements of 2.9% of GDP for 2017. We believe that higher oil revenues (in spite of lower oil output) and a large dividend from the central Bank (possibly around 1.5% of GDP, resulting from exchange rate gains on international reserves) will be crucial. However, the recent decision of the government to smooth gasoline price variations through the adjustment of the excise tax (until the transition to full liberalization is completed in December 2017) introduces a new element of risk. Specifically, this means that any depreciation of the exchange rate will have a smaller positive effect on fiscal flows (considering that even though the local currency value of oil revenues would increase, the government would drain revenues from a lower IEPS that would need to decrease to stabilize gasoline prices). 


Alexander Müller 



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