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Headline inflation drops again in August; further declines expected in
September
In August, consumer prices increased by 0.38%. The increase was in line
with expectations and with the trend in consumer price variations observed
in the past months. Because of the August increase, annual headline
inflation dropped from 5.5% in July to 5.3% in August. For September, the
Consensus expects a price increase of 0.54%, which would further reduce
headline inflation to 4.9%.
Central Bank tightens policy to reduce 2003 inflationary expectations
Despite the rather favourable development in headline inflation, the
Central Bank decided to tighten monetary policy. On 23 September, the
board of the Banco de México raised the money market "short" (corto) from
300 million to 400 million pesos per day. The corto keeps a limit on money
market liquidity and constitutes the main policy instrument in the hands
of monetary authorities. Rather than being concerned about this year’s
inflation target of 4.5%, the Bank sees its 2003 inflation target of 3.0%
as being threatened. While inflationary pressures on goods prices remain
contained, the Bank sees sizeable upward pressures in the services sector,
resulting from above-inflation salary increases. The officials believe
that a tighter monetary policy stance will help to bring down high
inflationary expectations underlying the salary negotiations. Consensus
Forecast panellists are sceptical that the Bank will achieve its objective
to bring down inflationary expectations and see 2003 year-end inflation up
a notch since last month.
Increasing oil revenues may provide room for additional public spending
In the first eight months of the year, the public sector registered a
surplus of 3.9 billion pesos (US$ 416 million). Budgetary revenues
increased 0.1% in real terms over the first eight months of last year,
whereas net budgetary expenditures increased by 1.6% in real terms for the
same period. The positive development in revenues was influenced by a 6.6%
real increase in income tax collection, as the fiscal measures approved by
Congress last December have begun to kick in. However, the much debated
luxury goods tax remains insignificant in terms of generating revenues. On
the other hand, the weaker domestic economy in the first eight months of
the year reduced the value added tax collection by 1.5%. Furthermore, oil
related revenues dropped 5.2% in real terms despite the fact that the
price for the Mexican mix was 4.6% higher in the first eight months of
this year compared to the same period last year. In the remaining months
of this year, oil revenues should contribute positively to the budget. In
September, the price for the Mexican mix averaged US$ 25.3 per barrel and
was thus 21.6% higher than in the same month last year and well above the
US$ 15.5 assumed in this year’s budget.
Fortunately, in late September, the government avoided an imminent strike
of the national oil workers' union in the last minute. The strike
threatened to interrupt oil output but the 7.3% salary increase granted to
oil industry workers by the Fox administration successfully averted a
production stoppage and inflows of needed revenues. Therefore, if the
price remains at current highs or increases further, as the current
geopolitical situation suggests, the Mexican government may gain leeway to
increase expenditures and compensate spending cuts implemented earlier in
the year to meet its 0.65% of GDP deficit target. Any excessive spending
in the wake of higher oil prices such as typically is the case in
Venezuela is very unlikely. Consensus Forecast panellists continue to
believe that the government will only slightly overshoot its fiscal
target, with the budget deficit expected to reach the equivalent to 0.68%
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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