Mexico’s proposed 2021 budget is attracting attention this week choosing a path of fiscal prudence and austerity rather than one of fiscal stimulus taken by many governments elsewhere. So far, Mexico’s leftist President, Andres Manuel Lopez Obrador (AMLO) has taken the view that Mexico can recover better if it is not encumbered by a heavy debt burden.
The draft budget looks for the primary deficit, excluding interest payments, to be balanced in 2021 and reach a surplus of 1% of GDP in 2024. Total debt to GDP is forecast to fall to 53.7% of GDP from 54.7% this year. The Finance Minister, Arturo Herrera, noted at a press conference that a foreign exchange surplus of MXN150-200bn pesos from the Central Bank will help reduce debt by 1%. The budget increases health and infrastructure spending by 9.2% and 5.5% respectively and the government is not planning tax hikes at this juncture given the economic hit to growth.
The government’s growth estimates in particular are attracting debate: the central scenario looks for the economy to shrink 8% this year and rebound 4.6% next. The Central Bank of Mexico’s 24-28 August survey of 35 economists are more pessimistic with the mean estimate forecasting growth at -9.97% for 2020 and 3.01% for 2021. The Finance Minister, Arturo Herrera defended the estimate in press conference commenting: "Actually it is not a very optimistic estimate, in fact if you think that there will be a drop of 8% and on that a growth of 4.6%, it does not even put us at the growth levels of 2019, it is a responsible estimate". He also noted that the estimates were not contingent on a Covid-19 vaccine being available. Nevertheless, the lack of fiscal stimulus does imply Mexico’s growth is likely to be weaker than if greater stimulus were deployed.
Mexico August inflation data, released yesterday, showed CPI increased 4.05% yoy up from 3.62% yoy in July. This suggests the Central Bank may be more cautious in cutting rates: at the August 13th Meeting, Gerado Esquivel dissented from the 50bps cut of the policy rate to 4.5% instead proposing a cut of 25bps. However, a further cut at the very least is still generally expected and the Central Bank is due to meet on September 24th. On a positive note, the Banxico data showed net foreign inflows into MBonos in August with the purchase of MXN5.6bn compared to outflows for the March-July period. Prudent fiscal policy and relatively high real rates against general US dollar weakness have helped the Mexican peso rally from the March lows. It has continued to appreciate versus the USD in September (up ~2.3% spot basis at the time of writing) and at ~MXN21.39 is well off the March low of MXN25.3588.