Mexico's government wants to have its cake in 2020 (fiscal discipline) and eat it too

MEXICO - In Brief 09 Sep 2019 by Mauricio Gonzalez

Mexico’s government just published its macroeconomic outlook and fiscal plan for 2020. In our view it presents a very optimistic prospect on both accounts. Most likely next year’s economic growth will be below 2%, the fiscal deficit higher than the government foresees (2.7%-3.0% of GDP) and the primary surplus. Fiscal discipline will loosen up moderately next year, opening the possibility of further deterioration in the following years. The government considers GDP growth could evolve from 0.5% this year to 2.0%, without anything that justifies such an improvement. At the same time the government considers stabilizing inflation at an annual 3% next year is enough for domestic interest rates, on the order of 200 basis points and for the peso-dollar parity to remain at $20 by the end of next year. The government considers crude oil production could increase from a current 1.67 to 1.95 million barrels per day, and exports can remain at 1.1 million barrels per day. In our view these assumptions are significantly hopeful. In consequence, public revenues are overestimated, both oil and non-oil, the first because in the opinion of energy experts Pemex is not devoting enough resources to crude oil exploration and exploitation and is focusing on low yield fields that could hardly produce the desired government goals. GDP growth most likely would also limit a tax revenue increase and keep it below the 3.7% real increase target. In consequence, overall public revenues may diminish by about 0.3 to 0.4% of GDP for 2020, compared to this year´s. On the spending side, overall public sector expenses are underestimated, mainly interest payments, if the 200 basis point drop does not occ...

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