Economics: The stabilization funds in a context of shrinking revenues

MEXICO - Report 09 Sep 2019 by Mauricio Gonzalez and Francisco González

The extent to which economic growth is expected to deteriorate further in 2019-2020, combined with the precariousness of public revenues and spending, suggest that the Ministry of Finance may use the federal spending budget for 2020 to change the rules that determine the way specific funds are to be applied in an effort to assure they can be used for countercyclical policies.

For many months now, everyone from both domestic and foreign analysts, institutional investors and multilateral institutions have all been busy scaling back their growth forecasts for the Mexican economy to levels that increasingly depart from the more optimistic projections contained in official texts. Overall, economic growth expectations for 2019-2020 will be significantly below Federal Government targets.

With GDP trending much lower than either 2019 budget criteria or next year’s pre-criteria had projected, such unanticipated economic weakness will lead to significant revenue shortfalls as persistent risks may continue to weigh negatively on consumption, investment, exports and, by extension, economic growth. In response to such mounting economic and fiscal concerns, we expect the government to soon unveil a series of reforms designed to clear the way for it to draw more greatly on various stabilization funds as part of a countercyclical policy.

This week we explore the many rules and legal restrictions in place to avoid a raid on such reserves as well as more specific objective limitations, such as the extent to which the Banco de México trading surplus of past years, on which government drew heavily, will deliver nothing to the current government next year or possibly in the years to follow. Furthermore, we may see a leveling off or outright contraction in Mexico Petroleum Fund proceeds.

As we have emphasized for years, there is a need to adjust public finance to accommodate the pressures we can expect will lead to greater public spending both on social programs and to address pressing infrastructure needs. We also stress the importance of redirecting public spending toward productive activities and social programs with adequate evaluation methods, expanding the tax base, eliminating waste and achieving a more efficient promotion of economic growth, all measures that could help contain public debt and avoid a deterioration of funding conditions.

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