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Total budgetary expenditures increased 4.1% in real
terms in the first half compared to the same period last year. Since the
difference between projected and actual revenues was not related to the
behaviour in the oil price, the revenue shortfall cannot be covered with
resources from the Oil Stabilization Fund. Therefore, the government
adjusted expenditures downwards by 6.8 billion pesos (US$ 740 million) to
guarantee that the 0.65% of GDP fiscal deficit target for 2001 will be met,
as mandated by the automatic stabilizers included in 2001 budget decree.
The adjustment represents the second consecutive budget cut this year, as
it comes on top of the 3.4 billion peso cutback (US$ 350 million) carried
out last April. The strict fiscal discipline applied by the
administration of President Fox has prompted Consensus Forecast panellists
to maintain their fiscal deficit forecast for this year.
Deflationary bout in July lowers
headline inflation below 6% and prompts further cutbacks in year-end
inflation forecasts.
On 9 August, the Mexican Central Bank reported that consumer prices
dropped 0.26% in July. This was the lowest rate ever reported since the
calculation of the consumer price index in 1968. The actual price decline
was also below market expectations, which had been reduced amid a
deflationary bout in the first half of the month. Weaker domestic gas
prices (-13.1% over June) were the primary cause of the July price drop.
Without this gas price decline, consumer prices would have increased by
0.06%. The core inflation index, which excludes volatile items such as
the domestic gas prices, rose by 0.16% in July. As a result of the July
price decline, annual headline inflation dropped to 5.88% in July from
6.57% in June and now stands well below the Central Bank’s 6.5% year-end
inflation target. Panellists have reflected the recent price declines by
further lowering their year-end inflation forecasts.
Interest rates reach historic low as
Central Bank loosens monetary policy.
The continuous reductions in inflationary expectations as well as the
strength of the Peso have paved the way for further monetary easing by
authorities. On 31 July, the Central Bank announced its decision to
reduce the so-called short (corto) to 300 million Pesos (US$ 32.75 million)
from 350 million Pesos. The corto is the Central Bank’s main monetary
policy instrument used to regulate the daily balances of the commercial
bank accounts with the Central Bank. The reduction of the corto
represents the second monetary easing in two months. On 16 May, the corto
had been lowered from 400 million Pesos to 350 million Pesos. As a result
of the increased liquidity, domestic interest rates have dropped to
historic lows. At the primary auction following the announcement, the
rate for the benchmark Cetes 28 day paper had dropped to 8.34% from 9.4%
previously and on 9 August, the rate dropped further to 7.24%. The
current level is the lowest interest rate for the one-month paper since
its first offering in 1982. Just six months ago, the rate was still above
18%. However, a persistence of the current rapid downward trend in
interest rates is unlikely, since further declines would make the Mexican
treasury bills unattractive relative to comparable U.S. Treasury bills.
As a result of the recent developments, panellists have yet again revised
their year-end interest rate projections downward.
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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