MEXICO – Fiscal balances improved in 2Q21

Public debt fell further amid a higher GDP base

Julio Ruiz

29/07/2021


The main measures of fiscal balances improved in 2Q21. Using 12-month rolling figures, the nominal fiscal deficit stood at 2.6% of GDP in 2Q21 (from a deficit of 3.4% of GDP in 1Q21), while the primary balance stood at a surplus of 0.3% of GDP (from a deficit of 0.2% of GDP in 1Q21). In turn, the Public Sector Borrowing Requirements (PSBR), the broadest measure of fiscal balance, posted a deficit of 4.3% of GDP in 2Q21 (from a deficit of 4.6% of GDP in 4Q21).

Total fiscal revenues increased 7.3% as of 2Q21 yoy in real terms, supported by an improved macroeconomic environment and one-off revenues. Tax revenues increased 1.1% YTD in real terms as economic activity recovered, driven mainly by the value added tax (8.8%), but with income tax revenues growth remaining soft (-0.9%). In turn, oil revenues increased 62.9% YTD reflecting higher oil prices and a capitalization of the sovereign to PEMEX worth MXN 96.7 billion (the transaction is also recorded as an expenditure of the federal government, leaving the consolidated deficit unchanged). Finally, non-tax revenues increase 19.4% YTD in real terms (149.1% just in June) as the federal government recovered several trust funds spread across the administration.

Total fiscal expenditure grew 4.1% yoy in real terms as of the 2Q21. Looking at the breakdown, expenditure without non-avoidable items (financial cost, non-earmarked transfers, and pensions) and ex-capital increased 6.1% yoy in real terms. In turn, financial expenditure increased sharply (122.4% yoy in real terms) linked to the capitalization from the federal government to PEMEX and a MXN 7.5 billion transfer to the rainy-day fund. Finally, financial cost fell by 10.1%yoy in real terms. 

Higher fiscal revenue estimates allowed the government to accommodate higher expenditure, keeping the nominal and primary fiscal balance projections unchanged. Higher fiscal revenues (in nominal terms) for 2021 are expected by the MoF driven by higher oil revenues (oil price was revised to USD 58.8 per barrels from USD 55 per barrels in the 1Q21 report) and the recovery of trust funds. On the other hand, the tax revenue estimate for 2021 remained practically unchanged (relative to 1Q21 report) despite an increase in the GDP growth forecast for 2021 (from 5.3% to 6.0%). Likewise, the expenditure estimate for 2021 increased in the same amount of fiscal revenues, keeping the nominal and primary fiscal balance estimates unchanged at -2.8% of GDP and 0.0% of GDP, respectively. Nevertheless, the public sector borrowing requirements, the broadest measure of fiscal balance, estimate for 2021 increased to 4.0% of GDP (from 3.4% of GDP) due to the use of trust funds (assets) to finance expenditure.  

Public debt fell further amid a higher GDP base. The historical balance of public sector borrowing requirements, the broadest measure of public debt, stood at 47.9% of GDP in 2Q21 (from 52.4% of GDP in 2020), while net debt stood at 47.7% of GDP (from 52.1% of GDP).

We expect fiscal accounts to remain broadly stable in 2021. While better economic outlook and higher oil prices support fiscal accounts, still optimistic oil production, larger than expected expenditure needs for AMLO’s priority projects and relying on one-off revenues are risks.

Julio Ruiz