Economics: Public finance numbers foreshadow big challenges
The current administration’s handling of fiscal policy to date poses serious budgetary and financial challenges going forward about which we can glean some warning signs in the latest public finance data. That trajectory will be a determining factor for Mexico’s macroeconomic stability over the short term as well as the economy’s medium term outlook. That perspective is all the more alarming given the pace at which the Covid-19 pandemic is stalling global activity and stoking international financial turmoil to degrees that it is far too early to fully to assess.
The release in recent days of public sector financial data for January 2020 provides us with an initial look at some surprisingly positive yet largely transitory developments, and while the numbers are hardly enough to draw any trend conclusions, they hint at many potential pitfalls for the current year and next, even before incorporating recent global developments. These include fiscal challenges related to a softening of key revenue sources and higher spending requirements to deal with the worsening context. And despite assurances from the Ministry of Finance since late last year that the calendar for new bid rounds would be moved up as part of an effort to set the stage to eventually implement a counter-cyclical fiscal policy, there is as yet no sign of any progress on that front. Furthermore, as we begin 2020 we are witnessing a continuation of substantial public spending cuts, including resources allocated to investment in infrastructure and basic services provision.
The federal government’s petroleum-related revenues are unlikely to vary significantly to the extent that price hedges on export crude are applied and it continues to collect the same absolute amounts of gasoline excise taxes, but that scenario assumes crude and gasoline sales volumes hold up under developing global conditions. And given Pemex’s apparent exposure on multiple fronts we could see its financial position further debilitated, possibly pushing it off the investment grade cliff, carrying Mexico’s sovereign debt ratings in its wake.
Such problems could be further aggravated by the extent to which the administration imposes an additional degree of budgetary rigidity that robs it of room in which to make cuts in the face of future challenges.
Now read on...
Register to sample a report