Economics: Same inertial budget defects as before

MEXICO - Report 14 Sep 2020 by Mauricio González and Francisco González

Many analysts, ratings agencies and financial institutions were quick to describe the 2021 budget package the López Obrador Administration sent Congress last week as optimistic, especially regarding how it anticipates GDP growth and budgetary revenues, mainly those from oil, with its unrealistic estimate of Mexican export crude prices and the petroleum volumes the country can achieve. And they perceive a similarly bullish approach to some spending items, such as how much support the government might have to provide Pemex and the expense of servicing Mexico’s public debt.

We regard several of the administration’s key assumptions as being at the high end of expectations of 2021 economic recovery, and in that sense the problem resides in the extent to which the budget, taken as a whole, fails to provide the elements necessary for this administration to regain lost credibility while also helping to undercut a heightened sense of uncertainty and distrust. More specifically, the budget package fails to provide measures for addressing the country’s economic and health crises, or greater margins within which public finance can operate now that the government has depleted most of the non recurring funding sources it inherited, especially by the extent to which it has drawn on stabilization funds.

Although the economic and financial assumptions text that precedes the revenue and spending bills insists the administration will prioritize domestic funding sources, such a policy would mark a sharp departure from the approach the government has maintained since taking office. But a continuing dependence on foreign funding sources could further increase country risk, especially if a weaker peso raises the cost of such credit further.

It begs credulity to assume the government will be capable of delivering next year on the budget’s fiscal and financial objectives. A much more likely scenario would involve the materialization of the risks the criteria document cites, beginning with significant delays in coming up with an effective Covid-19 vaccine, and heightened reticence about investing in Mexico, especially now that we are approaching next year’s decisive midterm elections.

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