Economics: Risk Sources Cloud Fiscal Outlook

MEXICO - Report 22 Sep 2016 by Mauricio Gonzalez and Ernesto Cervera

Mexico’s Ministry of Finance submitted its 2017 Economic Package to the Mexican Congress on September 8. The package includes the proposed Federal Revenue Budget, the General Economic Policy Criteria and the draft of the Federal Spending Budget.

The various components of the 2017 package pose daunting challenges for the coming year, particularly in the context of the Mexican economic slowdown and international turbulence as 2016 winds to a close.

The proposed budget calls for an extension of the programmable spending cuts the administration has pursued recently but we are concerned by the continuing growth trend in non programmable spending.

The zero-based budgeting approach adopted in 2015 has been practically jettisoned, and officials at the Ministry of Finance have recently insisted there is no longer any room for making any further spending cuts next year.

The central question about the viability of the 2017 plan lies not in the absolute figures proposed for the coming year’s budget but in the growth we have been seeing on the non-programmable expenditure side. Specifically, expenses in connection with transfers to state and municipal governments have been rising sharply in 2016 (8.6% in January-July).
We would add to the volatility scenario the Ministry of Finance describes a number of aggravating variables related to the second half of 2016 (Brexit, Trump, etc.), suggesting that the country will start next year in a more adverse situation than officials are currently contemplating.

In this week’s Outlook section we analyze the main variables included in the macroeconomic framework, and both the revenue and spending assumptions for 2017, as well as the macroeconomic risks that could affect public finance in the short and medium terms.

In other economic news, the National Association of Supermarkets and Department Stores (Antad) reported that sales at all stores of affiliated retailers, including newer locations, were a real 2.0% above year earlier levels, the weakest increase reported in 20 months.

Same store sales of affiliated retailers (those that have been open for at least a full year), fell a real 1.0% last month, the first such negative report since a 2.7% real term contraction in December 2014. The most recent contraction extended to all three components of the report.

Sales were squeezed by an adverse calendar effect as there was one less shopping weekend this past August than there was in the same month the previous year. They also suffered the sequential effect of the unusually strong sales that accompanied the summer sales promotions that were largely concentrated in the months of June and July.

And while internal consumption continues to show strength, the moderate growth that characterized the second quarter suggests we can expect slightly weaker results for the remainder of the second half of the year.

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