The increases in interest rates by central banks around the world will have an impact on the financial cost of debt, which in turn is one of the pressures on Mexican public spending, analysts pointed out.

So far this year, various central institutions, including the Bank of Mexico (Banxico), have increased their interest rates in order to try to contain the high levels of inflation that have been registered and that are putting in check the recovery of the economy, and affecting the most vulnerable population.

“The impact on the cost of debt will depend on how high the rate reaches. If this rate rises to 9 or 10%, a number that was not contemplated in the markets and less in the numbers that the Ministry of Finance and Public Credit (SHCP) has regarding the debt”, said Mario Correa, vice president of the National Committee of Economic Studies of the IMEF.

Initially, according to what was approved in the Federation Expenditure Budget (PEF) 2022, the government expected to allocate 791,463 million pesos to this item; but, in April, this expense was modified upwards to 869,337 million pesos due to the increases that were presented in the interest rates of various central banks.

However, this amount could be even higher given the persistence of inflationary pressures and the change in expectations about interest rates, particularly Banxico’s. In recent months, analysts and institutions have been increasing their projection of the interest rate level for this year, and it is currently believed that it could reach 9.50 percent.

It will reduce fiscal space

A higher than expected increase in interest rates, especially by Banxico, will reduce the fiscal space that is already small, said Alejandra Macías, general director of the Center for Economic and Budgetary Studies (CIEP). .

“The perspective is that this cost will increase because we have to remember that we have both internal and external debt, and if interest rates increase, this item will definitely increase and will join the spending pressures that we have in other aspects and that can affect us a lot in the fiscal space,” he said.

According to the data as of April this year, 67% of the debt is internal, while 37% corresponds to external indebtedness. In total, the Historical Balance of the Financial Requirements of the Public Sector (SHRFSP), the debt in its broadest measure, totaled 13.12 billion pesos.

“The advantage is that you have a good part in a fixed rate but, through the movements that you have in the exchange rate and those that are not at a fixed rate, they will continue to increase the financial cost and for future issues you will get even more expensive,” said James Salazar, deputy director of Economic Analysis at CIBanco.

lower than expected

Although the monetary policy has tightened since last year, the financial cost of the debt registered, in the first four months of the year, a lower expense than had been contemplated.

In the first four months of the year, the government allocated 188.988 million pesos to debt service, 12.450 million pesos less than what was contemplated in the period.

In addition, it was slightly lower than the resources allocated a year earlier. In total, the financial cost of the debt decreased by 0.2% annually.

Today there will be a monetary policy decision

Banxico would increase the reference rate by 75 basis points to 7.75%

The market expects that, this Thursday, the Bank of Mexico (Banxico) will follow in the footsteps of the Federal Reserve (Fed) of the United States and increase its interest rate by at least 75 basis points (bp), to bring it to a level 7.75 percent.

Last week, the Fed increased its interest rate by 75 percentage points, a movement not seen since 1994. In this way, the rate was in a range between 1.50 and 1.75 percent.

The foregoing, according to various institutions, opens the door for Banxico to do the same at its monetary policy meeting, the result of which will be announced hours after the National Institute of Statistics and Geography (Inegi) reports the inflation of the first half of June.

At the last meeting, only Deputy Governor Irene Espinosa voted in favor of an increase of 75 points. For this new meeting, it is expected that more deputy governors will join it and, even, some analysts do not rule out that there are members who put on the table the discussion of a stronger increase of 100 basis points.

“I don’t think that Banxico will go in any other direction than the Fed, the big question now would be how much its rate is going to rise. There was talk, from previous meetings, that it had to be more aggressive than the Fed, so the question is that if the Fed raised its rate by 75 base points, will Banxico raise it by 1% in a single meeting? It seems to us something unprecedented, but we will have to see how all this plays out”, said Jorge Marmolejo, portfolio manager of Franklin Templeton Mexico.

Meanwhile, the latest Citibanamex Expectations Survey showed that the market expects Banxico to close the year with a rate of 9.50 percent.

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