Itaú BBA - MEXICO – Public finances continued improving in July, in the eve of the budget bill

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MEXICO – Public finances continued improving in July, in the eve of the budget bill

August 31, 2017

We do not expect the 2018 budget to announce more ambitious fiscal consolidation measures

In July, the public deficit narrowed further, providing the last picture of the fiscal accounts before the announcement of the 2018 budget bill (which will be presented to Congress next week; the legal deadline is September 8). Resulting from exchange rare gains on international reserves during the previous year, the Central Bank’s dividend – which reached a historical high in 2017 (MXN 322 billion, 1.5% of GDP) – accounts for the bulk of the improvement in fiscal accounts seen recently. Nevertheless, as we have been pointing out, the fiscal deficit indicators are narrowing beyond this windfall revenue. In fact, even if 70% of the amount of the dividends received in past years is excluded (as the remaining 30% is directed to stabilization/sovereign funds, and therefore recorded as both revenues and expenditures), the 12-month rolling primary balance reached a MXN 52 billion surplus (0.2% of GDP) in July, from a MXN 40 billion surplus in June. Likewise, using the same metric (ex-dividend), the 12-month nominal fiscal deficit narrowed to MXN 452 billion (2.1% of GDP), from MXN 471 billion in June, and the public sector borrowing requirements (broadest deficit indicator) narrowed to MXN 535 billion (2.5% of GDP), from MXN 577 billion previously.

Revenues are growing, led by oil revenues, while expenditures are contracting (although year-to-date expenditures have actually exceeded the levels dictated in the budget, by MXN 37.2 billion or 0.2p.p. of GDP). In real terms, during the first seven months of 2017 oil revenues expanded 20.4% year-over-year, as the increase of oil export prices (41.2%) and exchange rate depreciation (3.7%) more than offset the fall of oil output (8.8%). These variations do not add up exactly to 20.4% because oil revenues also take into account additional variables (natural gas, other PEMEX revenues, income taxes levied on private oil firms, among others). Non-oil revenues increased 5% year-over-year, largely explained by the Central Bank’s dividend (even though last year’s dividend, MXN 239, 1.2% of GDP, was also sizable). In contrast, the growth of tax revenues was meager (0.5% year-over-year), with income tax collections (4.6%) performing better than the value added tax (1.3%). On the spending side, during the same period (January-July), net expenditures fell 1.9% year-over-year, driven by the contraction of primary spending (3.5% year-over-year) which indicates that fiscal consolidation is making headway. Importantly, government investment in physical assets fell by 23.8% year-over-year, which represented a major drag in the construction sector. Financial expenditures, nevertheless, rose 13.4% due to MXN depreciation (comparing average levels in January-July 2017 and the same period of last year) and the interest rate hikes of the Central Bank.

The gross and net public-debt-to-GDP ratios continued decreasing in July, and it is highly likely that 2017 will mark the first decrease of this ratios in ten years. Net debt of the public sector decreased to MXN 9,298 billion (44% of GDP, according to our calculations) from MXN 9,302 billion in June. Gross debt increased a bit in peso terms (to MXN 9,795 billion, from MXN 9,701 billion in June), but decreased as a share of GDP (to 46%, according to our calculations). The decrease of debt ratios is mainly explained by exchange rate appreciation (14% year-to-date), which has reduced the peso-value of foreign currency debt.

We do not expect the 2018 budget – to be announced next week – to take the pace of fiscal consolidation up a notch, compared to what was already pre-announced in the “pre-criterios” (pre-budget) document published in April. As of now, the government is targeting public sector borrowing requirements of 2.5% of GDP in 2018, more ambitious than the target set for 2017 (2.9%, which will likely be met by a wide margin considering that the rolling 12-month measure of PSBR stood at 1.5% of GDP in July). The fact that there are presidential elections next year (which is usually associated to higher government spending in Mexico) reduces the probability of extra fiscal efforts. Also, with the rating agencies – S&P and Fitch – recently removing the negative outlook for Mexico’s sovereign rating, policymakers are now under less pressure. In fact, the Finance Minister, José Antonio Meade, has stated that the 2018 budget is unlikely to show any surprises in terms of greater fiscal consolidation efforts. 


 

Alexander Müller




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