Economics: The public financial squeeze ahead

MEXICO - Report 10 Feb 2020 by Mauricio González and Francisco González

Based on the report on public finance and debt results for the fourth quarter and for full-year 2019, as well as the way the current year is shaping up, the near term points to the likelihood of a further deterioration of public finance even as the government touts its select accomplishments to date (the positive primary balance, a slight reduction in net public debt, and the stabilizing of the public sector borrowing requirements).

A closer look at those accomplishments gives us initial reasons for concern. With revenues continuing to fall, the primary surplus target was met only by raiding the country’s Oil Revenue Stabilization Fund – had the government not done so, the primary balance surplus would have fallen by more than half or it would have had to make even deeper public spending cuts – and by starving some of the current administration’s priority policy areas and autonomous bodies through a combination of budget cuts and underspending.

Even Pemex was subjected to a real 2.3% reduction in spending despite the continuing erosion of its financial health, production platform and sales. In fact, the company’s results were inflated last year by the government’s 97.1 billion peso equity infusion into the NOC. To make matters worse, instead of prioritizing key business areas, the government requires Pemex to assign much of its budget to projects of dubious profitability, all of which suggests we should expect the company to continue to decline in the coming years, and that the firm will need even greater capital infusions over the medium term, a prospect that would further erode the outlook for Mexico’s sovereign debt. In fact, it looks as though it will be necessary to make cuts to Pemex’s capital expenditure budget, making it all the more difficult for the firm to reactivate its production platform, while also adding to the problem of the massive debts it is accumulating with vendors.

We expect weak tax collections to continue to contract in the absence of any fiscal reform for the foreseeable future, and as the economy remains stalled; we at GEA estimate the economy will budge only +0.2% this year.

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