Analysts see potential for Mexico spending cuts despite govt’s bullish GDP outlook

Some analysts are calling out Mexico’s finance ministry for overly optimistic revisions to key macro estimates with the 2022 and 2023 budget outlook, including a 3.4% GDP growth estimate for this year they say could spur spending cuts.

“The current conditions for the global and domestic economies do not validate a growth rate of 3.4% for the Mexican economy,” Moody’s Analytics' Latin America head of economic analysis Alfredo Coutiño told BNamericas. “Particularly when the US estimate has been reduced to 3% and the US is the main engine for the Mexican exports.” 

The 3.4% estimate is a reduction from the 4.1% baked into the 2022 spending bill that congress approved in December; however, it’s well above the 1.8% median estimate in the central bank’s monthly survey of private sector analysts released on Friday. 

The revision was part of the finance ministry's budget outlook update report that is sent to congress on the first day of the month of April, updating the macro metrics used to determine the annual budget, in this case for 2022 and 2023.

For inflation, the ministry now sees the year-end rate for 2022 at 5.5%, compared to an estimate of 3.4% in December. The new prediction is just below the 5.8% median forecast in the central bank survey.

With prices soaring in March amid the war in Ukraine, the ministry’s oil price estimate jumped to US$92.9/b from US$55.1/b in December. However, any apparent benefit on the side of revenues is not real, said Coutiño, adding: “Oil prices are a double-sided sword for Mexico, because the country is a net importer of oil products.” 

“In net, the country does not benefit from high oil prices but rather suffers a trade deficit which in the end reduces GDP,” Coutiño said. “Also, considering that neither the level of crude oil production nor the volume of exports will increase in 2022, then the price effect is totally null for the country.”

The latter points are reflected in the ministry’s report with expected oil production dropping to 1.820Mb/d (million barrels per day) from the 1.826Mb/d estimate in December. Likewise, it lowered the estimate of crude exports to 879,000b/d from 979,000b/d. 

Looking ahead, the ministry forecasts 2023 GDP growth of 3.5%, as well as an average price for the Mexican oil mix at US$61.1/b – suggesting the administration expects global oil prices to remain elevated going into next year.

It sees oil output climbing to 1.85Mb/d in 2023 with exports at 764,000b/d.

Gonzalo Monroy, managing director at energy consultancy GMEC, told BNamericas that even though the revised figures for crude exports “are in line with what’s actually coming,” the estimates on the oil price and production for both 2022 and 2023 are “very high.”

The ministry also forecasts a 0% primary deficit for this year, compared to the 0.3% estimate made in December with public debt to GDP reaching 49.6%, up 1.4 percentage points from the December estimate and 0.4pp lower than in 2021.

Carlos Morales, Fitch Ratings director of Latin American sovereigns, acknowledged the positives in the ministry’s report, saying in a statement that it “maintains a prudent fiscal policy aiming at a zero primary balance consistent with a stable debt burden as percentage of GDP.”

Unrealistic growth projections, however, could lead to lower-than-expected government revenue, added Morales, which could force the government to choose between reaching its fiscal deficit target or making spending cuts.

Coutiño said this year’s 3.4% growth estimate does not account for the expected monetary policy tightening in the second half of 2022, with some estimates for the year-end reference rate going as high as 9% from the current 6.5%, “thus imposing a brake to domestic demand and consequently limiting the economy’s performance.”

He added, “Given the chronic anemia of investment, Mexico’s economy does not have capacity to grow at a stable rate higher than 2%, if it does, then it will develop internal and external imbalances.”  

Consequently, Coutiño said, the only reason to believe the economy could reach 3.4% growth is to consider the government letting go of its targeted deficit level and allowing for expansionary fiscal spending, “which is not the case.”

James Salazar, deputy director of economic analysis at CI Banco said the government might be trying to shield itself from the reality of low revenues, so as to continue public spending undeterred. 

“The government is looking for cover, it doesn’t want to throw in the towel yet,” said Salazar, as reported in local daily El Economista.

The current mood in Mexico is one of “economic weakness” and if the economy takes a stronger turn for the worse, the ministry will have to update their model, he added.