Economics: New Rules on Local Gov’t Finance
President Enrique Peña Nieto signed the Law of Financial Discipline for States and Municipalities on April 27. The enactment and eventual application of this law constitute a major step forward by spelling out the very specific obligations that state and municipal governments must abide by in their short, medium and long term planning, their fiscal discipline and debt levels, and their transparency and accountability.
The great significance of this law becomes apparent when one studies what has happened to the debt of state and municipal governments in recent years, as even local governments that had historically never run into problems of financial obligations began to take on troubling levels of debt.
It will be especially important to analyze whether during the period of implementation the information requirements and the indicators for generating alerts properly express the real risk posed to public finance in each state. It will also be important for the various governmental institutions to coordinate their efforts to generate and analyze information if the law is to prove effective and if the credit is to be used efficiently to address the weaknesses that exist in many states on various levels.
In this week’s “Outlook” section we analyze the Financial Discipline Law as well as the current state and future prospects of state and municipal government debt based on the most recent information that has been made public.
In other economic news, the authorities reported last week that Mexico’s Gross Domestic Product (GDP) grew 2.6% during the first quarter of 2016, a result identical to the estimate we at GEA made for the same period. Commercial activity, with its 3.6% year on year increase during the quarter, was among the components that contributed the most to Gross Domestic Product growth. Another service sector component that contributed significantly to the economy during the quarter was mass information services, which grew 11.8%, the sharpest percentage increase of any service subsector last quarter.
Moreover, some tourism-related services also produced very favorable figures for the quarter, thanks in large part to the Holy Week vacation period, which fell in March as opposed to April a year earlier. Because of this, the segment of temporary lodging and beverage preparation services showed firm growth (6.8%). Services providing leisure, cultural and recreational activities grew 4.4% during the same period.
The industrial sector made much less of a contribution to GDP because construction (up 2.0% yoy) and manufacturing (1.0% yoy) turned in only mildly positive performances, while mining (-3.3% yoy) continued to act as a drag on economic activity.
We at GEA expect the Mexican economy will experience lower growth during the second quarter of the current year than it did during the first. We estimate GDP will grow at a 12-month rate of 2.0% between April and June as opposed to the 2.6% expansion of the first quarter.
Following the release of the GDP report, the Ministry of Finance and Public Credit announced it was lowering its target GDP growth range for the current year. The new forecast range anticipates an increase of between 2.2 and 3.2%, down from the previous range of between 2.6 and 3.6%.
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