Itaú BBA - MEXICO – 1Q19 fiscal balance helped by lower expenditures

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MEXICO – 1Q19 fiscal balance helped by lower expenditures

mayo 2, 2019

Lower oil production and weak growth are the main risks to public finances

On a 12-month rolling basis, the main fiscal balance indicators remained close to the Ministry of Finance (MoF) targets for 2019. Using 12-month rolling figures, the nominal fiscal deficit improved to 1.8% of GDP in March (from 1.9% in February and 2.1% in 2018) and was below the MoF target for 2019 of 2.0% of GDP. In turn, the 12-month rolling primary surplus stood at 0.8% of GDP in March (practically unchanged from February and from 0.6% in 2018), but remained slightly below the MoF estimate for 2019 of 1.0% of GDP. The Public Sector Borrowing Requirements (PSBR), the broadest measure of fiscal balance, posted a deficit of 2.1% of GDP (practically unchanged from February and from a deficit of 2.3% of GDP in 2018), below the estimate of the MoF for 2019 (a deficit of 2.5% of GDP).

Public finance registered lower revenues in the 1Q19 mainly due to lower oil revenues (fall in oil production). Total fiscal revenues decreased 1.2% in real terms year-over-year in the 1Q19, mainly due to a fall in oil revenues (-24.7%) as a result of a lower oil production (1.7 million barrels a day versus 1.9 million barrels a day expected by the MoF). In turn, tax revenues increased 5.1% in real terms year-over-year in the 1Q19, supported by a real increase in gasoline excise tax revenues of 72.6% in the same period, while tax revenues without gasoline excise tax revenues increased just 1.1% in real terms. We note that the substantial increase in gasoline excise tax revenues is the result of the full elimination of the subsidy to the gasoline excise tax in the last months of the previous Administration. However, as the new Administration increases the subsidy (to keep the promise of freezing gasoline prices in real terms), this effect should fade away.

However, lower expenditure is helping the main fiscal balance indicators to remain close to target. Total fiscal expenditure decreased 6.1% in real terms year-over-year in the 1Q19. Total fiscal expenditure without non-avoidable expenditure items (financial cost and non-earmarked transfers) decreased by even more (-10.1% year-over-year in the1Q19). According to the MoF, the decrease in expenditure is the result of a reconfiguration of social programs and changes in the government purchase policy, which has increased expenditure efficiency. The transition effect (at the beginning of the first year of a new administration there is usually under-spending early in the year) is helping expenditures to fall. In contrast, financial cost increased 6.1% year-over-year in real terms.

Stable public debt in the 1Q19. Net public debt stood at 43.6% of GDP in March (from 43.5% in February and from 46.0% in 2018), while gross debt stood at 44.6% of GDP (from 44.5% in February and from 46.8% in 2018).

The result of the 1Q19 public finances is consistent with AMLO’s commitment to fiscal responsibility, but execution of the targets ahead is a risk given the many expenditure promises. 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, we also see GDP growth as a risk for revenues (we expect 1.4% GDP growth this year, lower than the government’s forecast: 1.6%). 

Julio Ruiz

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