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September 9, 2020

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MEXICO: 2021 budget mixes austerity and pet project spending

BY Nicholas Watson

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( 3 mins)

The 2021 draft budget unveiled yesterday, 8 September, did not produce any real surprises. The USD 292bn budget is a blend of government austerity; fiscal discipline; some over-optimistic core assumptions; and spending increases for President Andres Manuel Lopez Obrador (AMLO)’s pet infrastructure projects and clientelist social programs.

Rosy macro-projections: the finance ministry (SHCP)’s growth forecast for 2021 is 4.6%, following what it says will be an 8% contraction this year. According to averages taken from the Central Bank (Banxico)’s regular survey of economists, the economy will contract by 9.9% this year and only rebound by 2.95% in 2021. An overly optimistic growth rate, which sets great store on the possibility of a Covid-19 vaccine, means that tax revenue assumptions could well be revised downwards. Even the exchange rate projection (MXN 22.9 to the USD) could end up looking unrealistic, given the potential for volatility arising from uncertainty over a future sovereign credit rating downgrade.

Unrealistic oil outlook: the two key variables are the oil price (set at USD 42.1/b) and production (1.85mn bpd). The oil price assumption is not entirely unreasonable, but the production target looks highly ambitious. Production averaged 1.69mn bpd in the first seven months of this year, and in July, it dropped to 1.6mn bpd, the lowest level since 1979. Lower-than-projected production will obviously affect overall government revenues. Meanwhile, state oil company Pemex must achieve this increase with only a 0.6% real-term budget increase, with little clarity as to the government’s ability to keep on supporting the company with capital infusions.

Austerity: AMLO is sticking to his austerity credo. Not only does this entail a 0.3% real-term reduction in spending from what was initially approved for 2020, including cuts to various parts of the public administration, but it also means no new taxes or debt (other than to refinance existing liabilities). However, the government has requested authorization to raise the aggregate upper debt limit, which makes the 53.7% of GDP objective potentially subject to some slide.

Budget generosity: in a budget lacking any other countercyclical stimulus measures, two broad areas will see spending increases: AMLO’s flagship infrastructure projects and government social programs. The Santa Lucia airport project sees the biggest budget increase but the Tren Maya and Dos Bocas refineries also see generous increases despite longstanding question marks over their value and utility. Social programs get a 6.6% boost on what was approved for 2020, with pensions for the elderly (roughly USD 6.2bn) the most extensive of the AMLO programs. As an aside, the 9.2% increase for health may not be as generous as it first appears; some resources will come from reallocations.

Investor confidence: the absence of stimulus measures to foster investment and job creation beyond the flagship projects will likely keep business sentiment muted, which will in turn act as a drag on economic reactivation. Two developments yesterday suggest that there will be no quick recovery in confidence; the government voided a tender for the construction of a section of the Tren Maya because of AMLO’s hostility to public-private associations. In parallel, a senator from the governing National Regeneration Movement (Morena) tabled an initiative to nationalize lithium deposits; AMLO has previously ruled out nationalization, but the initiative could see a debate in the future about regulatory changes for the sector.

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