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Bout
of deflation. In February, consumer prices
declined by 0.07% over January. The January reading marks the first
monthly decline in consumer prices since July 1971 and caught most
analysts by surprise, despite low expectations for February consumer price
variation of 0.06%. As a result of the drop in consumer prices,
annual inflation plunged from 8.1% in January to 7.1% in February.
The February drop was prompted by falling fruit and vegetable prices.
The core inflation index, which excludes these items, rose 0.82% over
January. As a result, the annual rate of core inflation dropped from
6.9% in January to 6.6% in February. The sudden drop in annual
inflation widens the maneuvering room for the Central Bank, which had been
caught in a dilemma: On the one hand, the obligation to tighten monetary
policy to bring down inflationary expectations in line with the inflation
target of 6.5% and on the other hand, the requirement to ease in order to
provide a cushion for the slowing economy. While significant risks
(peso stability and fiscal reform) persist, the drop in annual CPI
inflation, will assist the Central Bank in lowering inflationary
expectations. This month’s Consensus Forecast partially reflects
the February reading, dropping further over last month’s forecast.
Exceeding
public sector deficit. In 2000, the public
sector deficit reached 1.11% of GDP. The 2000 figure is only
marginally below the 1999 deficit of 1.13% of GDP. Furthermore,
despite the strong increase in oil prices and record GDP growth, which
prompted a 13.1% real increase in budgetary revenues over 1999, the data
were above the 1.0% of GDP target set at the beginning of the year.
According to the Finance Ministry, the deviation can be attributed to the
allocation of resources towards a reserve for extraordinary tax returns;
higher than authorized expenditures by public entities; higher
extraordinary expenditures and lower deferred payments, as well as the
increase in the subsidy to electricity rates resulting from higher energy
prices. In addition, the government used funds to pay off public
debt, which are included in the 2000 deficit. As a result, the ratio
of total net public debt to GDP decreased from 24.8% at the end of 1999 to
22.9% in December 2000, its lowest level since 1971. For this year,
the government has pledged a stronger fiscal stance and has set a target
deficit ceiling of 0.65% of GDP and expects to reach a deficit of 0.5% of
GDP. In order to achieve this more ambitious deficit target, the
government is negotiating the fiscal reform package with opposition
parties. Even though the planned revenue increases seem well below
expenditure hikes, panellists remain optimistic that the Fox
administration will achieve a deficit close to the official target.
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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