Economics: Evidence of public finance risks

MEXICO - Report 08 Apr 2019 by Mauricio González and Francisco González

Mexico’s public finance results remained unfavorable through the first two months of 2019, confirming that officials have very little financial room in which to operate, much less in which to fulfill the new government’s targets on the level of such central issues as expanding investment, increasing social spending, and stimulating economic growth. Moreover, it appears this administration will be especially slow to gear up public spending and even to begin efficiently collecting taxes as a whole new generation of officials and even lower-level public servants — deprived of the expertise of the thousands of employees who have been purged from government payrolls — are just beginning to traverse an entirely new learning curve. The situation is further aggravated by the extent to which investment, private consumption and economic growth in general have slowed, partly in response to the uncertainty stoked by the erratic and contradictory signals the government regularly serves up, as well as adverse external factors including the uncertain fate of the T-MEC/USMCA.

Pemex’s financial and operational health remains fragile, and we have yet to see anything that might bring any improvement on that front. This is especially concerning because of the direct contagion effect the company poses to public finance and Mexico credit risk.

The federal government has announced that it intends to take additional measures to support Pemex. However, we fear that the sorts of support measures officials have mentioned only constitute palliative rather than corrective care, and they do not contemplate important measures that can help expand production of oil and natural gas. In addition, talk is currently focused on paying down Pemex debt with proceeds from the Budgetary Revenue Stabilization Fund, a legally and financially dubious proposition.

All of these concerns are underscored by the 2020 General Economic Policy Preliminary Guidelines the administration unveiled this past week, which reaffirm deficit spending limits and debt targets, but project a revenue shortfall.

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