Economics: Troubling 2016 Budget/Debt Results

MEXICO - Report 15 Feb 2017 by Mauricio Gonzalez and Esteban Manteca

At the end of January the Ministry of Finance released preliminary data on the public finances for year-end 2016. The data pose many points of concern, and from various angles.
It confirmed a considerable rise in financial investment (170.1%) primarily resulting from the Energy Ministry's injection of assets into Pemex and electric power utility CFE to strengthen the state-owned firms’ financial health and lower their labor liabilities.

The accounts as of year-end 2016 also make clear the federal government’s inability to date to comply with the 164.1 billion pesos in spending cuts that the administration itself had argued were necessary; for the year, government spending surpassed by 20.8% the lowered levels it had announced and even by 9.5% after adding in financial investment results.
The branches that in absolute terms (in millions of pesos) overspent the most relative to the adjusted budget were Communications and Transport (+36.7 bn pesos), Public Education (+24.1 bn), Finance and Public Credit (+19.1 bn), and the Ministry of the Interior (+13.9 bn). The branches that underspent relative to the spending levels that were authorized following the adjustment were Social Development (Sedesol) (-3.1 bn pesos) and Health (-1.8 bn), both of which are ministries related to fighting poverty and social insecurity.
Due to the government’s incapacity to fully implement its own cuts and the effect of a weakened peso, net public sector debt continued to spiral higher in 2016, with that red column of the ledger swelling from 42.8% of GDP in 2015 to 47.9% in 2016.

In this week’s Economic Outlook we analyze the public finance results for full-year 2016, which point to weaknesses as the country faces the challenging panorama of 2017.
On a related note, last Thursday Banco de México decided to raise its benchmark interbank lending rate by 50 basis points. The central bank rate now stands at 6.25%.
With this tightening move, the Central Bank seeks to keep inflation expectations from contaminating price formation in the Mexican economy and to anchor those same inflation expectations, which have risen considerably in recent weeks, keeping in mind the current confluence of an adverse external environment and transitory shocks on the level of relative prices.

Economies from around the world, and especially emerging ones, are feeling the effects of the uncertainty regarding which fiscal, immigration and trade policies the new administration in the United States will ultimately adopt and whether they will effectively tighten financial liquidity, and both international trade and foreign direct investment flows.
Financial market volatility has intensified, and especially in Mexico beginning in January 2017, as investors sensed heightened risk related to economic ties between Mexico and the United States.

In its most recent monetary policy report, Banco de México spoke of a further deterioration of risks to both domestic economic growth and inflation.
As evidence of such pressures, a report released last week showed that consumer prices in Mexico had risen 1.70% in January compared to December and by 4.72% compared to January 2015. A major hike in the price of gasoline and an extension of the uptrend of recent months in goods inflation did the most to push the headline rate higher.

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