Economics: Public Finance Challenges Grow
Reports released last week by the Ministry of Finance provided insight into the recent evolution of the Mexican economy as well as the recent evolution of, and prospects for, both public finance and the country’s macroeconomic context.
On one hand, the ministry published public sector financial data for the first two months of 2017, which showed public finance evolved favorably during the January-February period of 2017, with the public deficit more than 100 billion pesos narrower than the gap that had been budgeted for the period and close to half the deficit recorded for the same two-month period a year earlier. However, part of that deficit reduction was due to a slowing of spending growth, including a 15.9% reduction in expenditures for physical investment following four consecutive years of cuts in such investment.
On the other hand, the ministry released its “Preliminary General Economic Policy Criteria for 2018”, the first document that will serve as the basis for drafting the government’s revenue and spending bills for next year. The criteria is based on a relatively conservative macroeconomic scenario very similar to the one that we at GEA are projecting.
In this week’s Economic Outlook we analyze the implications of the trajectory detailed in public finance through the first two months of 2017.
In relation to physical investment, the authorities reported that gross fixed investment fell 1.3% compared to the same month of 2016 owing to a 3.9% drop in GFI in the construction sector that, in turn, reflected a sharp plunge in its non housing component (-6.4%) at the same time as home-building also declined (-0.3%).
In contrast to construction investment, expenditures for machinery and equipment climbed at a 12-month rate of 1.3% on the strength of a 5.1% rise in the domestically produced component; spending on M&E of foreign origin was almost flat (0.2%).
While investment results for the first month of the year proved to be a disappointment, consumption continued to show strength, growing at a seasonally adjusted rate of 3.2% year on year, a result identical to the average monthly rate of 2016. Domestically generated services provided the most significant growth, rising 4.7% year over year, which marked an improvement over the 3.8% rise reported for January a year earlier and the average monthly increase of 2016 (+4.2%).
Growth in the component of goods of domestic origin slowed to 2.2% above levels of a year earlier, and the component of imported goods was flat following a generally negative trajectory in the previous nine months.
The rise in goods inflation, which may be a reflection of a foreign-exchange effect (peso depreciation relative to the dollar), may be one of the main factors leading to a reduction in purchases of imported goods.
On a directly related note, consumer prices increased an unexpectedly sharp 5.35% compared to the same month of 2016. It was the highest level recorded for that month since 2009, when inflation was reported at 6.04%. The main sources of price pressures were goods inflation and the sharp adjustment made to gasoline prices at the beginning of the year. The cost of the basic consumer basket was 7.84% higher than in March 2016.
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