Mexico - Economic Briefing November 2002

Economy at Crossroads Amid Wobbling US Economy (continued)

Public sector improves in third quarter allowing back-stepping on spending cuts
In the first nine months of the year, the public sector overall balance accumulated a surplus of 13.3 billion pesos (US$ 1.4 billion). According to the Finance Ministry, this figure is consistent with the fiscal deficit target of 0.65% of GDP for the year. Budgetary revenues registered a real annual increase of 0.9% during the first nine months of the year. The increase was mainly due to a 7.7% increase in tax revenues and a 14.5% surge in revenues from public entities under direct budgetary control. This beneficial impact was partially offset by non-tax revenues, which declined 28.9% in real terms, amid lower royalties and fees paid by state-owned oil company (PEMEX, Petróleos Mexicanos). Even though revenues increased in the first nine months of the year, they nevertheless stayed significantly behind the original programming due to a shortfall in non-oil tax collection, as economic activity remained well below expectations set out in the original budget. Higher federal government non-tax revenues, oil-related revenues and revenues of public entities under direct budgetary control other than PEMEX compensated for the tax shortfall (repeat?). Total budgetary expenditures remained practically constant, in real annual terms, with respect to the same period of last year. The revenue shortfall in the first nine months of the year was lower than that recorded in the first half, as oil prices recovered strongly. Consequently, the spending cuts made earlier this year could be reversed.

2003 budget sent to Congress
On 5 November, the government submitted its 2003 budget proposal to Congress, which contains the general policy guidelines planned for the coming year. The government plans to increase the public sector revenues by 2.6% in real terms compared to 2002 (1,449 billion pesos; US$ 142.0 billion). The increase comes despite a likely drop in non-recurring revenue, as the government sees a 5.5% increase in the tax take and a 5.2% rise in oil revenues. Public spending is supposed to increase by 1.8% over 2002 (1.5 trillion pesos; US$ 146.9 billion). Given the assumptions for GDP growth, inflation and other macro-economic variables (see table), the Fox administration aims for a fiscal deficit equivalent to 0.5% of GDP, down from the 0.65% of GDP deficit target in 2002. The budget plan is likely to be changed considerably during negotiations in Congress, where the Fox administration lacks a majority. In fact, the President is likely to face pressure to increase revenue sharing with the federal entities, which have already claimed higher transfers. Nevertheless, panellists have become increasingly confident in the government’s ability to deliver on deficit targets and are virtually in line with the official objectives.


Inflation remains in line with expectations in October but year-end target unlikely to be met
In October, consumer prices increased 0.4% and annual headline inflation remained virtually unchanged at 4.9%. The price movement observed in October was broadly in line with expectations and followed on a notably higher increase of 0.60% in September. The October price hike was mainly the consequence of surging prices for household gas and higher electricity tariffs. Consequently, the price index for core inflation, which excludes the volatile category of fuels, increased a much lesser 0.27% in October and the annual core inflation rate thus also remained virtually unchanged at 3.8%. Panellists expect consumer prices to increase by 0.44% in November, which would maintain the annual headline inflation rate at its current 5.0% level. Panellists see the rate remaining at that level in the final month of the year, which is well above the Central Bank’s inflation target of 4.5%. This year would thus mark the first year since the end of the Peso crisis in 1995 that monetary authorities overshoot their stated inflation target. However, core inflation is most likely to remain below the 4.0% threshold and thus well below the official inflation target, which should limit the negative impact of “officially” overshooting the target. The credibility, which Banco de México has built over the past years, should therefore remain largely intact. Nevertheless, panellists believe that monetary officials will surpass the target next year again, as the current level envisioned by the Consensus for 2003 also remains well above the official 3.0% target.

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.