President Andrés Manuel López Obrador failed his first market test when he shocked investors with plans to scrap a partially built $13bn airport project. But he appears to have learnt his lesson by presenting a fiscally prudent 2019 budget that sticks to a key surplus goal.
“Finance Minister Carlos Urzúa stuck to his 1 per cent primary surplus target even though the context kept on changing with a worsening economic outlook, higher rates and a weaker peso.” said Alonso Cervera, economist at Credit Suisse. “Markets would have been very disappointed had he lowered it.”
Benito Berber at Natixis noted that, after a people’s poll at the end of October sealed the airport’s fate and roiled markets, Mr Urzúa bumped up his primary surplus estimate to 1 per cent from a previously indicated 0.8 per cent level.
“They wanted to do something about their lack of credibility in the market, the peso depreciation and [bond] yields going up . . . it was very important that they delivered on that,” he said.
“It looks that there is a reasonable hand making the budget — very different from the guys pushing to cancel the airport,” said one former senior government official.
“The tide is turning — the US and China could go into recession, interest rates are rising so financing for emerging markets will get a lot more complicated. How are we preparing for it? Are you making sure you’re meeting your fiscal goals? It looks a bit less likely — and at a time when Mexico needs to send the message to investors that we’re still a serious country that you don’t want to pull out of”.
The 2019 “austerity” budget presented to Congress on Saturday night reassigned spending towards promised welfare and infrastructure projects and contained no new taxes.
It targeted growth next year of 2 per cent, an exchange rate of 20 pesos to the dollar, a 3.8 per cent rise in tax revenues, inflation of 3.4 per cent and a 19 per cent increase in the budget for Pemex, the state oil company that Mr López Obrador wants to “rescue”.
Alberto Ramos at Goldman Sachs said in a note to clients that the underlying macro assumptions “are, on balance, realistic and not very far from consensus”.
But he said he was “somewhat less comfortable with the projected 0.7 per cent of GDP decline in operational expenditure and the projected 0.3 per cent of GDP increase in non-oil tax revenue”.
One economist who asked not to be named was far more downbeat. “I don’t like it. It’s too optimistic on many fronts . . . they will have at least a one full point of GDP fiscal hole,” he said.
“The main thing to watch in the coming months are the numbers right? Were the calculations on the revenue side OK?” said Mr Berber.
Marco Oviedo, head of Latin American economic research at Barclays, called it a neutral budget with “more moderate” spending than had been expected.
He highlighted the fact that public investment — which Mr Urzúa has repeatedly stressed needs to rise to drive growth — was expected to be 2.9 per cent of GDP, compared with 2.8 per cent approved in the 2018 budget. Given the government’s commitment not to raise taxes, “public investment is what had to give,” Mr Oviedo said.
“It seems that as they’re just arriving, they don’t want to move things too much . . . there will be gradual changes,” he added.
Mr Cervera said some of the spending categories for pet projects, such as a planned Maya tourist train in the Yucatán peninsula and a bursary and apprenticeship programme for young people, “appear to be too low because they are getting started. The question is, in future years, how will they fund them? Will they have enough money without increasing or introducing new taxes?”
Mexico’s growth has long been stuck in a rut of around 2 per cent. But Mr López Obrador has vowed to change that, while dramatically shifting the oil industry towards higher production, an end to oil exports and self-sufficiency in oil refining.
Mr Cervera, however, has only pencilled in growth of 1.2 per cent for Mexico next year. He said the capital expenditure for Pemex was “not a lot” — calling into question its ability to meet ambitious production targets of an increase of 600,000 barrels per day by the end of the government’s six-year term.
“I’m curious to see what the rating agencies make of the fact that 1 in 5 pesos of Pemex capex is for the new refinery,” he added.
“It is a reasonable budget at the macro level if you think they can actually implement it. It is not as prudent as they say — they took out a lot of cushions. If you have a few surprises it will be very hard to meet their goals,” said the former official.
He likened the plan to a “reasonably competent surgeon attempting an operation that makes little sense. They are taking out a kidney from their no-good older son (inefficient expenditures that should be trimmed and made more efficient). It entails a reasonable amount of trauma.”
“The problem is that they think they are using that kidney to put it into their younger favoured daughter (better social and infrastructural spending) but they are probably putting it into their dog (bad projects and social spending without reform),” the former official added.
But the absence of nasty surprises meant markets were likely to give the budget the thumbs-up. “The headline looks in line with what was promised and markets will be happy,” said Mr Cervera.
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