Economics: Public finance outlook remains bleak

MEXICO - Report 17 May 2021 by Mauricio Gonzalez and Francisco González

Despite an optimistic perspective from the Ministry on Finance on the evolution of the first quarter public finances, the picture is not quite so rosy. What emerges from our reading of the official data is a weakening of public finance in 2021, a situation that could extend through the rest of the current presidential administration.

Budgetary revenue performed well on an aggregate level, but was largely complemented by the use of non-recurring resources and an accelerated expansion of public spending, which poses sustainability risks in the medium term. The panorama also includes an increase in the public deficit and major growth in dollar-denominated debt. Oil revenues mushroomed due to higher world prices, but non-oil revenues dipped 1.5%. An increase in public spending outstripped the growth in revenues three-fold, with increases in practically all its components except investment. The performance of revenues and expenditures in the first quarter fueled a public deficit of 83 billion pesos, which contrasts with the 27-billion-peso surplus posted in the same period last year.

This overall behavior of public finance aggravates several short and medium term risks, among them an operational and financial weakening of Pemex and the CFE, as well as the danger that revenue targets will not be met, although reprogrammed expenditure goals surely will. Other risk factors include the continued rise in pension and retirement benefit payments, an increase in the financial cost of public debt, volatility in world oil prices, and the need for greater injections of resources, above initial estimates, to complete AMLO’s emblematic public work projects.

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