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Central
Bank tightens monetary policy. Despite the
weaker than expected November industrial production, the Central Bank
decided to boost interest rates to counter the rising inflationary
expectations. On 12 January, the Central Bank raised the “corto”,
i.e. restricted the amount of credit available to local banks from 350
million pesos to 400 million pesos (the seventh increase since January
2000). Panellists have not yet factored in the latest move in
monetary policy into this month’s forecast, which sees the Cetes 28-day
rate (17.59% in 2000) to drop to 15.2% by the end of the first quarter.
Towards the end of 2001, the Consensus anticipates the benchmark interest
rate to drop further to 14.3%.
Fiscal
budget compromise prompts higher spending.
The tightening of monetary policy may also have been influenced by the
recent adoption of the 2001 budget, secured by the Fox administration just
before the end of 2000. The approval of the budget has been
generally perceived as a major victory for Fox, demonstrating his ability
to secure support in a congress where no party commands a majority.
However, while the compromise bodes well for the adoption of broad fiscal
reform in March-April 2001, Fox achieved this victory at the cost of
spending increases, which the administration had opposed. The
additional resources will be used mainly to strengthen the financial
position of states and municipalities, especially in Mexico's poor
southern states, and to reinforce the support to key sectors of the
economy. On the other hand, Congress allocated fewer funds to the
National Human Rights Commission and the judicial branch - strategic areas
in Fox's plan to crack down on corruption. In total, the planned
budget deficit is now equivalent to 0.65% of GDP, up from the 0.5% of GDP
stipulated in the bill originally sent to Congress. The main
macroeconomic assumptions considered in the original budget remained
unchanged and thus include, a real GDP growth rate of 4.5%; an inflation
rate no higher than 6.5%; a current account deficit of 3.8% of GDP; a
growth rate in the United States of 3.0% and an average price of the
Mexican oil mix of US$ 18 per barrel. The oil price level bears
downside risks as the price for the Mexican mix dropped below the US$ 18
mark in the last half of December 2000 and currently remains just below
US$ 20. However, the fiscal program contains automatic stabilizers,
such as tapping the Oil Stabilization Fund, that guarantee that the target
deficit will be met if the revenue falls short of expectations. Only
if the reduction in revenues (not caused by oil price declines) exceeds 5%
will the Fox administration have to seek Congressional approval.
Panellists have adjusted their forecasts according to the budget changes
but confide in the Fox administration’s ability to maintain the deficit
within the target. On average, panellists expect a fiscal deficit of 0.66%
of GDP.
Note:
The above text is an abridged version of the LatinFocus Consensus Forecast
briefing on Mexico. For more details please click here.
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