Economic Briefing November  2001

Peso appreciates amid rising hopes for fiscal reform

In September, the Peso lost considerable ground owing to concerns about the viability of the fiscal reform and the anticipated downside effects of the terrorist attacks on the Mexican economy has exacerbated losses.  As a result, the Peso reached 9.58 Pesos per US$ on 11 September, the weakest level since March.  However, as hopes for a successful conclusion of the fiscal reform sparked again, the Peso recovered most of the lost ground and strengthened to 9.26 Pesos to the US$ by the end of October, 2.8% stronger in nominal terms than at the end of September.  Panellists have maintained their year-end exchange rate forecast unchanged.  Moreover, the Consensus also maintained the exchange rate forecast for next year stable, despite the weakening of economic fundamentals and doubts over the development of the oil price.

Weak September tax take prompts third round of spending cuts

On 4 November, the Finance Ministry reported that public sector revenues weakened in September compared to the same month last year in real terms, owing to a decline in the value added tax (-2.9% year-over-year) and reduced import tax collection (-27.8% yoy).  As a result, third quarter public sector budgetary revenues were 3 billion pesos (US$ 325 million), below the inflows expected in the original budget, which implies an accumulated loss of 13.2 billion Pesos (US$ 1.4 billion) for the first nine months of the year.  The Finance Ministry has announced spending cuts of 3 billion Pesos in order to meet the 0.65% of GDP fiscal deficit target as stipulated by the automatic stabilizers included in this year’s budget.  The latest spending cuts represent the third adjustment to the original budget this year and is unlikely to be the last.  Given the adverse economic outlook for the final quarter, the government would have to cut back spending yet again or risk missing its fiscal deficit target.  Consensus Forecast panellists are sceptical about the dedication of the Fox administration to apply yet another round of spending cuts and believe the government will overshoot its target, with the forecast unchanged from last month at 0.8% of GDP.  Even though the fiscal reform package is still hotly debated in the opposition dominated Congress, the government has announced that it intends to send the 2002 budget proposal to Congress on 12 November, three days ahead of the legal deadline.  According to preliminary information, the budget deficit is again targeted at 0.65% of GDP based on economic growth projections of 1.7% in 2002 and an average price for the Mexican mix of crude oils of US$ 17 per barrel.  While the growth assumption is on the conservative side (0.3 percentage points below the current Consensus), the oil price assumption is well above the current price of US$ 14.19 per barrel on 7 November, which could provoke another round of adjustments in the coming year.  However, the budget proposal does not include the effects of the fiscal reform, which if approved will add between 1 and 2% of GDP to public sector revenue, depending on the result of the negotiations The uncertainty about the scope of fiscal reform finally to be achieved is reflected in the forecasts for next year’s fiscal deficit, which range from a balanced budget to a deficit of 1.2%. 

Note:  The above text is an abridged version of the LatinFocus Consensus Forecast briefing on Mexico.  For more details please click here.

For five-year forecasts, please click here.