Mexico’s public finances are not as vulnerable to the global increase in interest rates, as in previous years or as they are in other countries, said the deputy director of Fiscal Affairs of the International Monetary Fund (IMF), Paolo Mauro.
Mexico has a long maturity profile, of approximately 8.5 years, which gives it financial stability and flexibility to adapt its strategy to the expectation of rate increases, he argued.
From his offices in Washington, he admitted that higher interest rates make borrowing more expensive. But when comparing the country with others of similar development, Mexico stands out for its manageable debt profile.
Interviewed by El Economista, he explained that “the Mexican government’s debt has remained at around 58% of GDP for the last three years. A proportion that is not high by international standards.”
Although this proportion of debt compares favorably internationally, it is true that “it results from the decision made by the government to grant less fiscal support to the economy than that deployed by other countries.”
“Mexico still has fiscal space in case it needs to act in the future and can go to the international market at a reasonably low cost, which is good news in the current context.”
As the Fiscal Monitor shows, the average overall debt of emerging market governments is equivalent to 67.4% of GDP. That is to say, almost 10 points of the Product above that of Mexico.
Transfers, more efficient than subsidies
Regarding the global increase in oil prices and its impact on Mexico, he considered that it will have a nuanced impact.
It depends on the point of view we look at. For families, rising fuel prices hurt their finances.
For the government, we see slight profits that may benefit even the oil company, but in the second term, they will be used to finance the subsidy it is granting to fuels and fund subsidies for fuels in a context of global rises in energy prices, it can be much more expensive, he added.
The IMF has suggested that governments maintain a good social support network, and take advantage of the world experience of localized cash transfers to support the most vulnerable people.
People who have a car generally have good salaries. So you are also subsidizing them. Instead, if the government tries to expand its web of social benefits, and comes up with some novel cash-distribution strategy while keeping fuel prices high, it will help the people who really need it.
For the specialist, Mexico is characterized by the sophistication of its fiscal strategies and the experience of important economists, which can facilitate the development of less expensive programs to respond to high oil prices.
Pemex and efficiency
The deputy director of the fiscal affairs department at the Monetary Fund agreed to comment on the Pemex situation.
We have been recommending a change in the business strategy for a couple of years, so that it is redirected to upstream, which usually generates greater profits.
As explained in detail in the conclusions to Article IV for Mexico, agreeing to cooperate with experienced private sector specialists can also maximize company profits. And at some point it will be prudent to improve Pemex’s corporate governance and procedures.
They are recurring recommendations, he said. “But at the IMF we understand that these are issues that take a few years to correct. So we will continue to recommend in this direction”.
Inflation and tax reform
At this moment, where inflation is affecting people in their portfolios, central banks react to limit the advance, he stated.
Fiscal policy must be moved in a timely and prudent manner so as not to generate more inflationary pressures. And that has been the case in Mexico.
“Inflation tends to quickly affect interest costs for public accounts if the government has short-term maturities. But it is not the situation in Mexico, which also has stable public finances, in order and whose management has been prudent for many years.
Finally, he suggested exploring the possibility of promoting a tax reform that strengthens the sources of public revenue.
The reason is that Mexico needs to be able to finance better services such as education and health.
It needs to invest particularly in education because with the pandemic many children have been left out of the classroom and special efforts must be made to help them and mobilize resources.
Some ideas to increase public revenues come in the report. One is to reduce the exemptions in the personal income tax rate or in consumption taxes. Improve public administration and give more collection powers to subnational governments.