Economics: Budget search for credibility lost
The new government’s 2019 budget package includes relatively credible economic and financial assumptions underpinning a relatively austere budget proper as evidenced by a low fiscal deficit as the new government proposes some deep spending cuts to make room for its ambitious social policy agenda. Some factors may inflate the fiscal deficit and pubic debt beyond the new government’s targets, however we believe that if handed properly these elements ultimately may not pose a threat to economic and fiscal stability.
They include 2.0% GDP growth though at GEA we are projecting only a 1.8% increase in light of the decidedly negative effect the first year of any presidential administration has on government spending, and especially given the Texcoco airport cancellation and ensuing loss of business sector confidence.
We also see the government’s 3.4% inflation estimate for 2019 as too optimistic as it is more likely to narrow only to 4.0% this coming year. And the government’s projection of an average nominal benchmark interest rate (28d Cete) of 8.3% is at the extreme low end of the estimate range. Any domestic or external risk factor could propel domestic rates higher, depending on the scale of the catalyst in question, an observation that also applies to the government’s forex projection for the year (MXN20/USD on average). In short, public revenues may be moderately overestimated and spending underestimated.
Public sector debt is another area of potential concern although the 2019 budget calls for it to remain near projected year-end 2018 levels (45.4% of GDP). Nevertheless, in a financial context marked by uncertainty and heightened volatility, rising debt servicing costs as well as a potential shortfalls in tax collections due to the government’s determination to slash VAT and income tax rates in the northern border region we face the risk of a rise in non programmable spending and the assumption of additional debt in 2019.
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