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Peso weakens and tests 10 pesos to the US$ threshold for first time in two
years
In August, the peso continued its weakening trend albeit with erratic
upward and downward movements. By the end of August, the currency lost
7.9% of its value in nominal terms compared to the beginning of the year
and on 3 September, the peso even briefly shot through the 10 pesos to the
US$ threshold before recovering some ground. However, in the first week of
September the peso weakened again and closed at 9.99 to the US$ on 6
September. This was the first time the peso touched the psychologically
important barrier since June 2000. Back then, the peso exceeded the
threshold for only two years before initiating a two-year recovery, which
earned it the nickname of “super-peso”. This scenario could repeat itself
and the peso may once again rebound. The fundamentals bolstering the
currency are intact: the Fox administration has continued the austere
fiscal policy of its predecessor. Admittedly, the fiscal reform
implemented this year remained well short of what markets and the
administration had hoped for and the country’s public sector revenues
remain precariously dependant on the oil price. However, the current
outlook for the global economy and the increasing likelihood of an US
intervention in Iraq suggest that the oil price is likely to support
rather than undermine the peso. Panellists believe that the peso will
recoup ground by the end of the year.
Public sector deficit mushrooms in July …
In July, the public sector deficit reached 26.5 billion pesos (US$ 2.7
billion). The administration claims that the magnitude of the deficit is
mainly due to seasonal factors, most importantly, the traditional 45 day
lump-sum vacation payment to teachers. However, given the magnitude of the
deficit seasonal factors alone cannot be attributed with the full
responsibility. In fact, last year’s July deficit was only half the size
of this year’s. Furthermore, expenditures increased at an annual rate of
11.2% this July. This year’s expenditure increase is due to higher revenue
sharing disbursements to states and municipalities, which rose 10.8% in
real terms.
… but fiscal deficit target remains viable
Nevertheless, owing to fiscal surpluses earlier in the year, the
accumulated public sector deficit in the first seven months of the year
amounts only 2.6 billion pesos (US$ 265 million). Public sector budgetary
revenues increased 1.6% in real terms compared to the same period last
year. Net public sector expenditures were 1.9% higher in real terms than
in the same period of 2001. The main driver behind the revenue growth in
July was an 11.3% increase in income tax collection in the wake of the tax
reform. Lower oil-related revenues partially compensated for the growing
tax take, despite the fact that the oil price during the first seven
months of 2002 was slightly higher than in the same period last year. The
government confirmed its intention to achieve a 0.65% of GDP deficit and
claimed that July’s result is consistent with this target. Panellists
remain confident that the government will stay close to its deficit target
and have maintained their forecast unchanged at 0.7% since last month.
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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