Itaú BBA - MEXICO – 2Q19 Public Finances consistent with AMLO’s austerity measures

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MEXICO – 2Q19 Public Finances consistent with AMLO’s austerity measures

julio 31, 2019

The MoF is considering using the stabilization fund to offset lower revenues in 2019

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 1.7% of GDP in June (from 1.8% in May and 2.1% in 2018) and was below the MoF target for 2019 of 2.0% of GDP. The Public Sector Borrowing Requirements (PSBR), the broadest measure of fiscal balance, posted a deficit of 1.4% of GDP (from 1.6% of GDP in May and from a deficit of 2.2% of GDP in 2018), also below the estimate of the MoF for 2019 (a deficit of 2.5% of GDP). In turn, the 12-month rolling primary surplus stood at 1.0% of GDP in June (from 0.9% of GDP in May and from 0.6% in 2018), in line with the MoF estimate for 2019 of 1.0% of GDP.

Public finances registered lower revenues in 1H19 mainly due to lower oil revenues (associated with a fall in oil production). Total fiscal revenues grew a weak 0.6% in real terms year-over-year in 1H19, mainly due to a fall in oil revenues (-16.7%). In turn, tax revenues increased 4.4% in real terms year-over-year, supported by an increase in gasoline excise tax revenues of 69.5% in the same period, while tax revenues without gasoline excise tax revenues increased just 0.7% in real terms (decreasing 1.7% year-over year in June). We note that the substantial increase in gasoline excise tax revenues is due to a base effect, as the last administration eliminated fully the subsidy to the gasoline excise tax in the last months of 2018. However, as the new Administration increases the subsidy (to keep the promise of freezing gasoline prices in real terms), this effect should fade away.

Lower expenditure is helping the main fiscal balance indicators to remain close to target. Total fiscal expenditure decreased 4.5% in real terms year-over-year in 1H19. Looking, at the breakdown, fixed capital expenditure decreased 17.3% year-over-year (with a reduction of 21.2% in June alone), while total fiscal expenditure without non-avoidable expenditure items (financial cost, non-earmarked transfers and pensions) and ex-capital expenditure decreased 12.1% year-over-year. The fall in expenditure is the result of austerity measures and the transition effect (at the beginning of the first year of a new administration there is usually under-spending in the first half). In contrast, financial cost increased 4.8% year-over-year in real terms in 1H19.

The MoF revised revenue and expenditure estimates for 2019, keeping unchanged the primary and nominal fiscal balances. Oil revenue estimate for 2019 decreased by 0.2% of GDP due to lower oil production estimate (56 thousand barrels a day less compared to 1Q19 estimate), while the tax revenue estimate was revised down by 0.3% of GDP due to lower growth forecast (the new estimate uses a GDP growth of 1.1%, compared to a growth of 1.6% estimated in 1Q19). In contrast, the non-tax revenue estimate was revised up by  0.6% of GDP mainly due to the inclusion of resources from the stabilization fund (MXN 121 Bn or 0.5% of GDP) to offset the shortfall in tax and oil revenues estimates (compared to the Budget figures approved in 2018) in accordance to the fiscal responsibility law. The latest balance of the stabilization fund is (MXN 296 Bn or 1.2% of GDP). In turn, total expenditure was revised slightly up by 0.1% of GDP.

Public debt remains stable. Net public debt stood at 44.1% of GDP in June (from 44.9% in May and from 46.1% in 2018), while gross debt stood at 46.2% of GDP (from 46.6% in May and from 46.9% in 2018).

The results of Public Finances as of 2Q19 are consistent with AMLO’s commitment to fiscal responsibility, as the fall in fiscal revenues are compensated by a fall in expenditures (austerity measures and transition effect). Given expenditure and revenue (plus fiscal buffers) dynamics, we believe the MoF fiscal targets will likely be achieved in 2019. However, we expect a more complicated fiscal outlook for 2020: stabilizing oil production will be a challenge (in a context of AMLO’s energy policy, which imply less private sector participation in the energy sector) and soft economic activity next year, amid expenditure promises. 

Julio Ruiz

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