The economy continues to show signs of weakness. The leading economic indicator slipped 0.09 points from June to July, to 99.6 points (below the threshold of its long-term trend). With this in mind, we believe GDP growth will be 1.8% in Q3, and 2.0% in Q4.
Consumer inflation has remained stubbornly below Banxico’s target range, though the rise in producer inflation should eventually drive consumer prices up. We believe the pass-through effect of peso depreciation will eventually affect specific inflation components over the medium and long term, though at the moment this has been mitigated by the fall in commodity prices, oil and energy, and the reduction in government rates.
On September 8th, the Ministry of Finance presented Congress with its proposed 2016 economic package. The various components of this package—macroeconomic framework, revenues and expenditures, deficit and its financing -- all impose considerable challenges for 2016.
The budget assumptions for 2016 project a real decline of 0.2% in revenues, due primarily to an estimated 30% plunge in oil revenues. On the spending side, the Ministry of Finance expects a 1.9% drop in programmable expenditures, and a final primary deficit equivalent to 0.5% of GDP.
As many observers have predicted, given the slowdown, peso weakening, and the fall in world oil prices, the 2016 proposed federal spending bill contains major budgetary reductions. Despite public proclamations that the administration’s top priority is public security and the fight against organized crime, if the bill is approved, the institutions and agencies charged with such responsibilities will see their funding slashed.
This dovetails with an at best partial and deficient implementation of security measures President Enrique Peña Nieto announced on November 14th, following the public uproar and international fallout from the abduction and possible killing of the 43 Ayotzinapa students, and more recent decisions after drug kingpin Joaquin Chapo Guzman escaped from prison in July. The failure to implement radical changes in the administration of justice, to create mechanisms to ensure public security or to professionalize the police, coupled with the announced budgetary cuts, raises questions about the government’s commitment to public security.
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