Itaú BBA - MEXICO – Higher fiscal deficits ahead

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MEXICO – Higher fiscal deficits ahead

Abril 2, 2020

The fiscal update reflects worse fiscal revenues and some support to the economy through extra spending

The Ministry of Finance (MoF) published the Preliminary Economic Policy Guidelines (PEPG), which contains updated fiscal estimates for 2020 and 2021, including the macroeconomic variables used to calculate public finance projections.   

The macro projections include more realistic macro assumptions, except for oil production. Economic growth for 2020 is now estimated at -2.9% (before +2.0%), reflecting the negative impact from COVID-19, with a recovery of 2.5% for 2021. In turn, a low oil price scenario is expected, consistent with the oil price war. Finally, while oil production assumptions were revised to the downside, it remain somewhat optimistic, considering also a low oil price scenario which reduces the profitability of oil fields.

The MoF expects higher deficit for 2020, reflecting worse fiscal revenues and accommodating some fiscal support to fight the negative effects from the outbreak. For 2020, Nominal and primary fiscal balances deteriorated to -3.3% of GDP (before -2.1% of GDP) and -0.4% of GDP (from +0.7% of GDP). Looking at the breakdown, oil and tax revenues were revised down for 2020 due to lower oil production estimates, lower oil prices (despite having oil hedges to mitigate the impact) and a GDP contraction. We note that revenue estimates consider the use of around 0.6% of GDP from the “rainy-day fund”, leaving around 0.1% of GDP in the fund. On the expenditure side, programmable expenditure increased MXN 45 billion pesos, which reflects some support for the coronavirus outbreak (further details of the package to be announced soon). For 2021, nominal and primary fiscal deficit estimates stood at 3.5% and 0.6%, respectively. The deterioration of the fiscal balance for 2021 reflects a sharp fall in non-oil non-tax revenue (reflects an unfavorable base effect from the use of resources of the rainy-day fund in 2020 versus 2021), which is partly offset by an improvement in tax revenues (due to economic activity recovery), higher oil revenues (due to optimistic oil production) and lower expenditure.

Higher debt expected.  The historical balance of the public sector borrowing requirements, the broadest measure of debt, is expected at 52.1% of GDP for both 2020 and 2021.

The update fiscal estimates reflect reasonable macro assumptions (in a context of high uncertainty), but risks of further fiscal slippage remain given still optimistic oil production assumptions. 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 and given a low oil price environment which affects the profitability of some oil fields. PEMEX financial troubles are also a downside risk for fiscal accounts. 

Julio Ruiz

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