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Fitch: Mexico 2018 Budget Completes Five-Year Consolidation Plan
September 25, 2017 / 3:01 PM / in 3 months

Fitch: Mexico 2018 Budget Completes Five-Year Consolidation Plan

(The following statement was released by the rating agency) NEW YORK/LONDON, September 25 (Fitch) Mexico's 2018 budget, which sets out to complete a fiscal consolidation programme begun in 2013, is based on plausible assumptions and sets realistic targets, Fitch Ratings says. Adherence to the programme despite the shock to oil income and sluggish growth has supported the credibility of Mexico's policy framework and the country's 'BBB+' sovereign rating. But the fiscal outlook beyond 2018 is less clear as the fiscal goals of the next administration are only likely to be announced after next year's general election. The budget presented to Congress on Sept. 8 aims to reduce Mexico's public sector borrowing requirement (PSBR) to 2.5% of GDP, from the 2.9% budgeted this year. Consolidation will be supported by a modest economic acceleration, consistent with our view that GDP growth will average 2.4% in 2018-2019. Overall, underlying economic assumptions supporting the budget are generally in line with Fitch's forecasts. The strong fiscal performance expected this year, when Mexico will post its first primary surplus since 2008, will also help reduce the PSBR. Forecast outturns for 2017 have been boosted by the transfer of central bank profits worth 1.5% of GDP to the Treasury, but even without similar one-off contributions another primary surplus is forecast for 2018. The primary surplus excluding central bank profits is expected to increase from 0.4% of GDP in 2017 to 0.9% in 2018. A slightly lower government take from state-owned oil company Pemex means the contribution of oil income to public sector revenues will drop slightly in 2018, despite anticipated higher prices and largely stable production. The budget projects overall tax revenues broadly unchanged at 13% of GDP, highlighting lower dependence on volatile oil income. Additional consolidation worth 0.2pp of GDP is needed to reach next year's PSBR target, according to the Finance Ministry's revenue and spending assumptions. An anticipated rise in automatic fiscal transfers ("participaciones") to subnational governments and interest payments of 0.4pp of GDP along with increases in pension spending will be offset by capex and administrative cost cuts. The fiscal adjustment is relatively small compared with 2016-2017, and the current administration has shown a sustained commitment to consolidation. Cutting the PSBR to 2.5% of GDP would meet a target first set in 2013, when the PSBR was 3.7%. The authorities have shown their willingness to adhere to their medium-term fiscal goals despite a severe oil income shock and moderate growth, notably in 2016, when revenues grew strongly following the full implementation of tax reforms, and spending discipline was maintained at federal government level and at Pemex. Risks to fiscal accounts for 2018 include weaker-than-expected oil production or economic growth and a possible rise in spending ahead of July's general election. Uncertainty surrounding the NAFTA renegotiation process persists, as we commented in our revision of the Outlook on Mexico to Stable from Negative last month, but we believe the risks of a disruptive scenario for Mexico have fallen. At this juncture, Fitch does not expect the earthquake-related costs to adversely impact the government's fiscal goals for 2018. The revision of the Outlook also reflected the expected stabilization of the public debt burden. Fitch's forecast for gross general government debt suggest that it will remain steady around 42%-43% of GDP over the next decade, slightly higher than the 'BBB' category median. A steeper government debt decline beyond 2018 would require further consolidation and faster growth. Mexico has limited fiscal flexibility and modest, albeit increasing, resources in its stabilization funds despite the progress made in the last five years, and the next administration may face pressure to increase revenue further to meet rising spending needs (eg from pensions or higher interest payments) and reduce the squeeze on capital spending to support stronger growth. Contact: Arend Kulenkampff Director, Sovereigns +1 646 582 4720 Fitch Ratings, Inc. 33 Whitehall Street New York, NY 10004 Shelly Shetty Senior Director, Sovereigns +1 212 908 0324 Mark Brown Senior Analyst, Fitch Wire +44 203 530 1588 The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings. Media Relations: Benjamin Rippey, New York, Tel: +1 646 582 4588, Email: benjamin.rippey@fitchratings.com. 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