Itaú BBA - MEXICO - Pr. Econ. Pol. Guidelines (PEPG): responsible public finances, but execution is still risk

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MEXICO - Pr. Econ. Pol. Guidelines (PEPG): responsible public finances, but execution is still risk

April 2, 2019

Compared to estimates in the 2019 approved budget, fiscal targets remained unchanged for 2019 and improved for 2020.

The Ministry of Finance (MoF) published the Preliminary Economic Policy Guidelines (PEPG), which contains updated estimates for 2019 and 2020, including the macroeconomic variables that were used to calculate public finance projections. Unlike the 2019 Budget approved in Congress last December, this document doesn’t need to be approved by Congress.  

Compared to estimates in the 2019 approved budget, fiscal targets remained unchanged for 2019 and improved for 2020. For 2019, the primary surplus and nominal fiscal deficit stood at 1.0% and 2.0% of GDP, respectively. In turn, for 2020, the primary surplus and nominal fiscal deficit improved to 1.3% of GDP (from 1.1% of GDP in the approved budget) and to 1.6% of GDP (from 1.9% of GDP), respectively. Moreover, MoF’s estimates of the broadest measure of debt, the historical balance of public sector borrowing requirements, remained unchanged (45.1% of GDP for 2019 and 2020).  

However, GDP growth forecast and oil production projection were revised down, affecting tax and oil revenues estimates, respectively.  For 2019 and 2020, punctual GDP growth forecast stood at 1.6% (from 2.0% in the approved budget) and 1.9%, respectively. GDP growth forecast are closer to market consensus now, while implies a reduction in tax revenue estimates. At the same time, oil production estimate for 2019 stood at 1,783 thousand barrels a day (tbd), from 1,847 tbd in the approved budget, while for 2020 the PEPG show an improvement in oil production (1,916 tbd), from the 2019 figure. The rest of variables used to forecast fiscal accounts didn’t go through significant changes.

To keep the promise of reaching the MoF’s fiscal targets, given lower fiscal revenue estimates, the MoF adjusted down fiscal expenditures.  For 2019,  fiscal revenue estimates fell 0.5% points of GDP compared to the approved budget, mainly due to a fall in oil revenues. Tax revenues remained practically unchanged (the downward revision in the GDP growth is partly offset by a higher tax base reached yearned 2018).  As a result, to reach the fiscal targets in 2019, the MoF decreased fiscal expenditure estimates by 0.5% of GDP. Looking forward, for 2020, a decrease in expenditure of 1% in real terms (a difference of 0.7% of GDP) compared to the 2019 PEPG estimates, is needed to achieve the 2020 fiscal targets.

The PEPG continues to reflect the commitment of AMLO’s government to keep responsible public finances, but execution is still a risk. Reaching MoF fiscal targets will depend on the capacity of AMLO’s administration in performing the necessary expenditure cuts (0.5% and 0.6% of GDP for 2019 and 2020, respectively). Moreover, stabilizing (and at some point increasing) oil production will be a challenge for public finances (in a context of AMLO’s energy policy, which imply less private sector participation in the energy sector). Finally, despite higher tax base at the end of 2018, we still see g rowth as a risk for revenues (we expect 1.4% GDP growth this year, lower than the new government’s forecast). 

 

João Pedro Bumachar
Julio Ruiz



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