Public Debt in Mexico

Mexico - Public Debt

Government presents austere budget amid political turmoil

The administration of President Enrique Peña Nieto has presented plans to ramp up the country’s two-year austerity drive in its 2017 budget, pledging more spending cuts and a return to a primary budget surplus for the first time since 2008. On 8 September, newly appointed Finance Minister José Antonio Meade presented the 2017 draft budget to Congress, which will be discussed by lawmakers in the coming months. Meade, who took office on 7 September after Luis Videgaray resigned from his post as a result of the fallout from the meeting between Donald Trump and Peña Nieto on 31 August, has sent a clear message: the government is willing to cut spending as much as necessary to consolidate Mexico’s weak fiscal position as soon as possible. The decision to appoint Meade for the job was welcomed by the markets as he is seen as likely to continue the essence of the government’s economic policy trajectory, which explains why the reaction of the financial markets was fairly muted.

The draft budget states that the government will trim the headline fiscal deficit from an expected 3.0% of GDP this year to 2.4% of GDP in 2017. Public sector borrowing requirements (PSBR), which is the broadest definition of the fiscal deficit, are expected to drop slightly from 3.0% of GDP this year to 2.9% of GDP in 2017. It is worth mentioning that this year’s PSBR was expected to reach 3.5% of GDP and yet it was drastically reduced to 3.0% on the back of non-recurrent revenues stemming from the transfer of the Central Bank’s operational profits to the government. A highlight in this draft budget is the government’s pledge to achieve a primary budget surplus equivalent to 0.4% of GDP next year—the first primary surplus since 2008 and double what was initially estimated.

In order to reduce the fiscal shortfall, the government has remained focused on cutting spending further rather than increasing debt or taxes. The proposed 2017 budget cuts add up to MXN 239 billion (USD 12.9 billion), which accounts for about 1.2% of GDP, and is well above the MXN 169 billion cuts already announced for this year and the MXN 124 billion slashed last year. The lion’s share of the cuts will come from state oil firm PEMEX, from reducing government personnel and from slashing government operating costs by about a fifth.

The message is indeed clear. The government is increasing efforts to consolidate its fiscal accounts within a context of significantly low global oil prices, more difficult financing conditions and a gradually deteriorating economic outlook for the country. Key assumptions in the document include the Ministry of Finance’s expectations that the economy will expand between 2.0% and 3.0% in 2017, inflation will end the year at 3.0% and the price for the Mexican mix of oils will average USD 42 per barrel. At this price, the Ministry of Finance secured a hedge on its oil-export price for 2017 at a cost of USD 1.0 billion. The hedge also covers a larger volume of exports (250 million barrels) than in 2016. Mexico’s annual oil-price hedge is considered the world’s largest sovereign derivatives operation and it was used to good effect in 2015, when it provided a substantial cushion following the collapse in oil prices that began in mid-2014.

Government struggles in the aftermath of Trump’s visit

The decision by President Enrique Peña Nieto to extend an invitation to Donald Trump, the Republican presidential nominee, to a private meeting in Mexico sparked sharp criticism from within the country. President Peña Nieto also invited Hillary Clinton, the Democratic presidential nominee to visit Mexico. Trump jumped at the chance to visit the country on 31 August hours before giving a major speech about immigration in Arizona, while Hillary Clinton categorically declined the invitation following Trump’s visit.

Many commentators and political analysts say that if President Peña Nieto was seeking to elicit an apology from Trump for comments characterizing Mexican immigrants to the U.S. as criminals and rapists, or prompt a softening of Trump’s hardline stance on immigration, he failed miserably. No public apology was expected when Donald Trump left Mexico, and he stated in his Arizona rally just hours later that Mexico would pay “one hundred percent” of the costs for a wall that he claims he will build along the Mexico-U.S. border if elected. Peña Nieto was then forced to dispute this, but the damage was already done.

In the face of a large media and political counterattack in Mexico, Peña Nieto has been at pains to justify the invitation as a sensible effort to enter into dialogue with a potential U.S. president, whose position on key issues represents a threat to Mexico’s interests. It is also plausible that the Mexican president was banking on a more favorable outcome to the meeting that would lead to immediate concessions by Trump and prompt an improvement in Peña Nieto’s opinion poll ratings in Mexico. However, this appears to have been a substantial political miscalculation. The brunt of the cost was borne by the Minister of Finance, Luis Videgaray, who resigned from his post, becoming a high-profile casualty of the visit. Videgaray is believed to have organized the visit, claiming that it would help to calm market jitters over the economic impact of a possible Trump victory in the upcoming U.S. presidential elections. Further resignations followed that of Videgaray, including those of Aristóteles Nuñez, Head of the Tax Agency, and Fernando Aportela, Deputy Finance Minister.

Luis Videgaray’s resignation leaves President Peña Nieto without his most trusted advisor. In fact, he was one of the main architects of the structural reform agenda that was passed in 2013 and 2014. That said, his influence on almost all aspects of policymaking was seen by many as an excessive concentration of power in a single ministry. Moreover, Videgaray had been seen as a possible successor to Enrique Peña Nieto, but Mexico’s disappointing economic performance during the administration’s current term, as well as the conflict of interest scandal revealed in 2014, have dampened his public appeal.

With two years left before general elections take place in July 2018, the popularity of the president is in free fall and could well fall much further. A recent survey from the daily newspaper Reforma showed that only 23% of Mexicans held a favorable opinion of the president. He enjoyed a 61% favorability rating when he entered office and yet now he is regarded more poorly than former President Ernesto Zedillo was at the height of the dramatic 1995 economic crisis. Peña Nieto’s government won international praise for moving quickly to enact a series of bold structural reforms across key sectors of the economy, but some of these reforms have shown mixed results and the country continues to face significant challenges. It remains to be seen if the Mexican president will be able to improve his standing, but his efforts to try could prove counterproductive if, as is characteristic of unpopular leaders, he tries all sorts of risky maneuvers to boost his ratings again.