Mexico’s deputy finance minister told GlobalMarkets it was “not fair” to call his country’s latest budget “austere” as market participants backed an unusual plea by the International Monetary Fund for the government to spend more.
In its Article IV mission concluding statement, published on October 6, the IMF said that Mexico — which has increased health spending and direct budget support to households and firms by just 0.7% of GDP — “needs more near-term fiscal support”.
“The authorities are encouraged to implement a comprehensive package of near-term fiscal and monetary support, credible medium-term plans to anchor fiscal sustainability, and reforms to boost investment and growth,” said the Fund. “Larger temporary near-term fiscal support would alleviate current distress as well as limit lasting economic damage.”
However, noting that “this is the first time we see the IMF move in a different direction to its usual austerity recommendations”, deputy finance minister Gabriel Yorio insisted that Mexico “does not have the fiscal margin for more spending and cannot use more debt, as defined by the constitution”.
Fitch Ratings said on Monday that Mexico’s finance ministry had “shunned” fiscal stimulus, calling the country “a standout in terms of the small size of its fiscal response”. Several analysts saw the 2021 budget published in September as indicating more of the same.
“Next year’s austere budget is an important factor behind our view that Mexico’s recovery will be very weak,” said William Jackson, chief EM economist at Capital Economics, on Friday. The research firm previously called the budget “frugal”.
Do ‘what is possible’
The government is pledging a 1%-2% real rise in total expenditure versus pre-pandemic levels, it said. Yet Yorio argued that it was “not fair to say it is an austere budget”.
“In fact, we have tried to ensure that spending does not fall with the revenue shock,” the deputy minister said. “As [IMF managing director] Kristalina Georgieva has said, richer countries should do whatever it takes to mitigate the crisis, but developing countries [can only] do whatever is possible.”
Analysts generally see Mexico’s budget, which projects a 0.2% primary surplus this year and a balanced budget in 2021, as based on optimistic revenue forecasts. Capital Economics called it “punchy” and said it could lead the government into “outright austerity” should it not meet revenue targets.
But one investor in Mexico City said this reading was mistaken, and “there was a reason for the over-optimistic budget”. “Banxico [the central bank] is going to have important profits this year, part of which will go into the budgetary stabilisation Fund [FEIP],” said the investor. “These funds can only be used if revenues come up short, so by being optimistic, the government will allow itself to tap the FEIP.”