Economics: Stable finance vs. bullish growth

MEXICO - Report 16 Sep 2019 by Mauricio Gonzalez and Francisco González

The minister of finance deemed the administration of President Andrés Manuel López Obrador’s 2020 budget assumptions and proposals “conservative”, but many analysts, specialists and ratings agencies beg to differ, deeming them “optimistic”. Conscious of the extent to which whatever credibility it may retain with such observers and investors involves its stated commitment to macroeconomic stability and keeping a tight rein on public spending and debt, the administration opted to emphasize those commitments by setting conservative fiscal targets. But in order to do so, officials opted to overestimate the pace of economic growth and revenue sources such as petroleum export sales and tax revenues.

By choosing to base its budget proposals on macroeconomic and public finance scenarios considerably more optimistic than most anyone else is entertaining, the government could be setting itself and the Mexican economy up for a serious letdown next year, with wide-ranging ramifications for the country’s economy, especially given the extent to which the drivers that had been powering growth for some time have stalled or are deteriorating, and government initiatives to date have failed to stem or even slow the deceleration.

Official policy will likely face much greater tests given the odds of an economic slowdown globally, and most significantly for Mexico, a softening of activity in the United States as well as a lack of visibility regarding the prospects for USMCA ratification.

Given the possibility of diminished growth in response to external factors as well as internal ones, we can expect the prevailing sense of uncertainty will continue to inhibit both consumption and investment. Moreover, public finance could be further squeezed by revenue shortfalls, posing officials with the dilemma of whether to risk applying the brakes to economic activity through deeper spending cuts, or to break its fiscal target commitments by significantly expanding the public deficit, shrinking the primary surplus and taking on more debt. Such a course could have adverse medium-term consequences for the country’s macro-financial stability.

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