Economics: Bigger Problems than Trump
The rating agency Fitch changed Mexico’s risk outlook last week from stable to negative, citing lower projected growth in the Mexican economy following Donald Trump’s victory at the polls. The Trump factor is, in fact, one of the channels of risk to public finances but it is important to note that a detailed analysis of the Federal Spending Law Congress passed for 2017 reveals that the main elements of uncertainty come from projected spending figures and legislators’ non-viable assumptions regarding revenue growth, which include no slowing of the rate at which the country is taking on debt in the short or medium-term.
Upon analyzing the latest data through October 2016 it becomes clear that the government will fall short of its budget adjustment targets because of a sharp rise in spending by administrative branches and general departments, as is evident in the almost 12% increase in public debt year to date compared to the same ten-month period of 2015, and despite the extraordinary income from Banco de México’s trading surplus, which officials presented as a basis for achieving macro-financial stability in the short term.
This week’s Economic Outlook analyzes the cuts that were made to the 2016 over the course of this year and how that compares to the spending budget Congress passed for 2017. A breakdown on the level of specific cabinet level departments and specific programs points to mounting uncertainty regarding public finance in the short and medium term.
In other news, Banco de México announced last Thursday that it was raising its benchmark interbank lending rate 50 basis points to 5.75%, its highest level since May 14, 2009, when the same day interbank stood at 6.0%. The monetary authority said the rate hike is aimed at offsetting inflation pressures.
In this regard, the institution said that one of the risks of higher inflation going forward is the prospect of an additional weakening of the currency due to the extent to which the outlook abroad has grown more uncertain, a development that could ultimately contaminate inflation expectations and generate second-order effects on prices. As a result, the central bank said that the balance of inflation risks continues to deteriorate.
Moreover, Banco de México noted that the Mexican economy faces an external environment characterized by the uncertainty associated with the possibility that the United States might begin to implement policies that could curtail foreign trade and investment. The authority added that the balance of economic-growth risks also deteriorated further.
On that note, the authorities reported that industrial activity fell at a seasonally adjusted, 12-month rate of 0.6% in October after having experienced minimal growth earlier in the year but posting increasingly negative results in the past four months. By way of comparison, industrial activity grew at a 12-month rate of 0.6% in October 2015.
The effects of weaker economic data and a more adverse external sector were apparent in the results of Banco de México’s last monthly survey of private sector economists for 2016, in which analysts cut their outlook for 2017 while leaving the previously trimmed forecast for 2016 unchanged.
Analysts scaled back their real-term GDP growth projections for 2017 to 1.60%, down from 1.72% in the previous survey. They left the consensus estimate for 2016 at 2.08%.
Similarly, analysts raised their inflation forecast for 2017 to 4.13% as opposed to the 4.01% projected near the start of November; the 2016 consensus estimate was unchanged at 3.41%.
Last, the analysts consulted by Banco de México anticipated that the exchange rate will conclude 2017 at 21.21 pesos to the dollar after they had arrived at a 20.89/USD consensus in the previous month’s poll. For 2016 they also raised their forex estimate to 20.74 pesos to the dollar, four centavos below their 20.78/USD estimate of the previous survey.
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