Mexico - Economic Briefing May 2003

Economy Battered by Weak U.S. Economy and Lower Oil Price (continued)

Peso continues to strengthen in April boosted by regional trend
In April, the Mexican peso continued its strengthening trend initiated in mid-March. Since 6 March, when the peso had reached an all-time high at 11.23 to the US$, the currency had strengthened substantially to 10.76 pesos to the US$ by the end of March, a nominal appreciation of 4.3%. In April, the currency appreciated an additional 4.8% closing at 10.27 pesos to the US$. The main reason behind the strengthening observed in the past two months seems to be increased optimism about the resilience of the economy. In addition, increased international investor risk appetite for emerging market assets and the corresponding rise in capital flows to Latin America has helped bolster the peso. The recent strengthening also confirms Consensus perceptions that the weakening trend observed since April 2002 would reverse by the end of this year.

Public sector incurs sizeable surplus in first quarter
In the first quarter, the public sector accumulated a surplus of 27.3 billion pesos (US$ 2.5 billion). In the same period last year, the public sector had incurred a deficit. Seasonal factors and accounting changes to the value-added tax (VAT), which led to a 18.7% real increase in VAT collection, accounted for the first quarter improvement. However, the increase also reflects an improvement in income tax collection and a higher oil price, which boosted oil income by 38.6% in real terms. As a result, the actual surplus exceeded the planned surplus by 19.4 billion pesos (US$ 1.8 billion). The government could have opted for an even higher surplus but instead decided to dedicate the windfall profits to extra spending in order to bolster the economy. Total expenditures increased 10.0% in real terms in the first quarter over the same period last year. Therefore, the fiscal surplus reached 1.7% of GDP, exceeding the Consensus figure, which had expected a 0.5% of GDP surplus. Despite this positive first quarter surprise, the forecast for this year’s fiscal deficit was left unchanged, since the favourable factors are unlikely to be repeated through the remainder of the year.