“Fiscal pressures will intensify between 2023 and 2024 for Mexico”

Investment bank Goldman Sachs warns that fiscal pressures for Mexico are likely to intensify in the last two years of this administration.

With persistent weak economic growth, shrinking room to cut public spending, and the depletion of fiscal savings, fiscal pressures are likely to intensify between 2023 and 2024, they explained.

In the Macro Panorama for Mexico, they stressed that “contingent liabilities from state-owned companies that are poorly managed and economically dependent on the government, further weaken the fiscal outlook.”

In the analysis, led by the economist for Latin America, Alberto Ramos, they showed that public debt, as a percentage of GDP, continues to be a source of relative comfort and a factor that favors Mexico when compared to other emerging countries.

According to projections from the Ministry of Finance, the country’s total debt will close this year at an amount close to 13 trillion pesos, which represents 50.3% of GDP. This proportion contrasts with 70% of the Product that it represents for emerging markets according to information released by the International Monetary Fund (IMF).

In the analysis, Goldman Sachs strategists argue that “the growth prospects for GDP are uninspiring” and its poor performance is also a limit to the stability of public finances.

Unnecessarily lacking

In the analysis they titled: “Neither too cold nor too hot. Just unnecessarily deficient ”, they highlighted that the combination of changes in regulatory policies for key sectors such as electricity, will continue to discourage investment.

In general, they state that the investment rate decreased from an average of 21% of GDP during the period 2014 to 2018 to 19.3% of GDP in 2019. And they state that it reached a minimum of 17.2% of GDP in 2020. This moderation it has a negative impact on productivity, the potential for growth and social deterioration, they stressed.

As a consequence of this context, they estimated a GDP rebound of 5.1% for all of 2021, which does not allow to compensate for the 8.2% contraction that was reached at the arrival of the pandemic.

They project that for the coming year, GDP will barely achieve an advance of 2.2 percent.

To arrive at these estimates, they assume that a stronger commercial exchange relationship, the advance of vaccination and the normalization of economic activities in lagging sectors such as services will contribute.

Far from budget expectation

According to the Citibanamex survey, released on Monday, December 21, the average expectation of economic growth for 2022 is 2.8 percent.

Among 28 expectations collected, Vector has the closest forecast to the one the government has, on which it based its budget for this year, of 4 percent.

The contrast is brought by Citibanamex and Grupo Bursamétrica, whose forecast coincides with 1.9% for GDP, far from the 4.1% estimated by the Ministry of Finance.

This average growth expectation shows an adjustment from the 2.9% that the average had at the beginning of December.

Buffer erosion

Goldman Sachs strategists are not the only ones who consider Mexico’s fiscal situation challenging towards the end of this administration. The economist for Mexico at BNP Paribas, Pamela Díaz Loubet, had already explained that the optimism in the estimate of GDP by the government causes the collection to be overestimated. The same is true of the level of debt as a percentage of GDP.

And as this has been the budgetary mechanism in Mexico, the authorities have compensated for this difference with the management of fiscal resources saved, for example, in the Oil Stabilization Fund (FEIP) in 2020 and other types of deposits.

The rating agencies Fitch and Moody’s have warned about the erosion of fiscal reserves that has occurred in this administration. The FEIP came to have savings of the equivalent of 1% of GDP and this year they ended up being extinguished, in such a way that they are no longer available for the second part of the six-year term, Moody’s warned.

Just in October, the deputy director of fiscal affairs at the International Monetary Fund (IMF), Paolo Mauro, explained that it is too early to think about rebuilding fiscal savings, both in Mexico and in the rest of the world. This will depend on the strength of the economic recovery.

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