April 28, 2015 / 2:31 PM / 5 years ago

UPDATE 2-Mexico central bank passes $2 bln in reserve gains to government

(Adds economist comments, background, paragraphs 6-10)

MEXICO CITY, April 28 (Reuters) - Mexico’s finance ministry said on Tuesday it will use a financial gain from the central bank’s record reserves to fund infrastructure spending in 2016, compensating for a hit to public finances from a sharp drop in oil prices.

The central bank gave the finance ministry nearly 31.5 billion Mexican pesos ($2 billion), the finance ministry said in a statement, from a gain made on the bank’s dollar reserves in 2014 due to the Mexican peso’s sharp depreciation last year.

Mexican President Enrique Pena Nieto drove up deficit spending during his first two years in office, but the government has cut back after a collapse in global oil prices in late 2014.

Mexico’s government uses income from the state oil company to fund about one-third of its budget.

A slower pace of infrastructure spending and private investment under a landmark energy reform is expected to crimp growth this year and next in Latin America’s No. 2 economy.

In January, Carlos Capistran, an economist at Bank of America Merrill Lynch in Mexico City, estimated the central bank’s total surplus at around 65 billion pesos.

He said in a note to clients that the government likely channeled the cash towards 2016 spending to avoid the impression it was pumping up building projects ahead of congressional elections this year.

The bank’s board is required by law to give its annual surplus to the federal government after it has met reserve requirements. But the board has room to decide how much it builds reserves, meaning there is discretion in the amount the board gives to the government, economists said.

Mexico’s peso has tumbled further to a record low this year, so the central bank could see another big gain this year to further shore up spending later.

Still, economists noted the surplus was relatively small in Mexico’s economy of around $1 trillion.

Since the currency’s battering during the global financial crisis, when Mexican assets were among the hardest hit, the central bank has amassed record reserves of around $196 billion.

In late January, Mexico’s central bank called for spending cuts to maintain confidence in government policy as the country braces for an expected slump in emerging market assets in response to expected rate hikes by the U.S. Federal Reserve.

The finance ministry followed the next day with budget cuts for this year, and later announced lower spending next year. ($1 = 15.2732 Mexican pesos) (Reporting by Michael O’Boyle; Additional Reporting by Joanna Zuckerman Bernstein; Editing by Andrea Ricci and Grant McCool)

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