Economics: A legacy of debt and narrow public finance margins

MEXICO - Report 20 Aug 2018 by Mauricio González and Esteban Manteca

Analysts have been concerned for some time about the direction of public finance in Mexico, but such considerations have been largely overshadowed by the headline-grabbing 2018 presidential campaign and its results, including the presidential transition process, the uncertainty surrounding Nafta and Trump’s recurring efforts to engage in trade wars, and the direction of monetary and interest rate policies at home and abroad.

But Mexico’s public finance was back in the spotlight recently as results for the second quarter proved to be disappointing. The weakness of the numbers contained in the report are a major component of what the outgoing administration of President Enrique Peña Nieto is leaving his successor. EPN may be leaving office without having sparked the much dreaded end-of-term financial crisis that Mexicans came to expect in the final decades of the 20th century, but it has left scant room for the next administration to assume any significant debt or avoid painful spending cuts

Moreover, the way in which public financial accounts are shaping up for the balance of the year will set the terms for drafting the 2019 federal budget, which in turn will define just how much financial room the incoming administration will enjoy while striving to fund the multiple programs and projects that President-elect Andrés Manuel López Obrador has proposed, whether they be focused on social assistance or investment. It is still too early to tell how much funding those programs will require: their implementation may be rolled out gradually in some areas and it may take time to incorporate all the program beneficiaries the administration is talking about. At the same time, investment projects will take several years to complete. Considerably less certain is just how strong a commitment the new administration brings when it comes to trying to accommodate such projects in the 2019 budget.

The latest deterioration of debt indicators poses a risk to public finance and medium-term stability in a context of international financial volatility, rising interest rates and greater risk perception on the part of some ratings agencies and institutional investors.
 

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