Mexico Decides to Stay the Financial Course

Sources:
Bloomberg: Mexico Needs No Stimulus to Withstand U.S. Slowdown, Finance Minister Says
Bloomberg: Pemex Scrapping Peso Bond Sale Signals Deepening Slowdown: Mexico Credit
FT: Mexico Presents ‘Prudent’ Budget
Market News International: Repeat: Mexico: 2012 Budget Plan Cuts Deficit to 0.2%/GDP

Mexico’s proposed 2012 budget calls for fiscal policies designed to stimulate economic growth while reducing the country’s budget deficit. The Mexican government hopes the budget will attract foreign investors by showing economic stability at a time of global economic uncertainty. Former Finance Minister Ernesto Cordero, who stepped down to campaign for the presidency, explained that the budget adjusts for the global economic slowdown by increasing public spending “without putting fiscal sustainability at risk.”

Mexico’s economy bounced back in 2010 after experiencing a deep recession the previous year. After recovering economically, Mexico wants to avoid resorting to excessive stimulus that increased debt in a number of other countries during the global financial crisis. Instead of increased borrowing, Mexico’s fiscal policy will concentrate on spending restraint in anticipation of a further economic slowdown to reduce the deficit to 0.2% of gross domestic product (GDP). The Mexican government, however, believes that the budget will stimulate growth despite any economic slowdown by increasing investment in Mexican industry and encouraging higher export volumes and consumption of Mexican goods.

Although Mexico is Latin America’s second-largest economy with growth that currently outpaces U.S. economic growth, it still lags behind other emerging markets. The Mexican government estimates that Mexico’s economy will grow by 4% this year, which is the second-lowest growth rate among Latin America’s major economies, ahead of only Venezuela. In 2012, the Mexican government expects Mexico’s growth rate to decrease by 0.5%. The United States’ economic crisis has affected Mexico’s growth dramatically as 80% of Mexican exports go to the U.S, and U.S. consumers are buying fewer Mexican goods. Critics fear that if the United States slips into a second recession, Mexico could see a drastic reduction in trade, tourism, and remittances, which would be disastrous for the country’s economy.

The Mexican Congress has until November 15 to approve the budget, which calls for 3.62 trillion pesos ($259 billion) in total spending—a 2.5% increase from 2011. The budget includes new investment in Pemex, the state-owned petroleum company that is also the second-largest non-publically listed company in the world. The budget also estimates 3.2 trillion pesos ($229 billion) in total revenue—a 3.8% increase from 2011. The government is counting on Pemex reversing its six-year decline in oil output to generate a 1.15 trillion pesos profit ($82 billion). The budget calculates revenue based on an average oil price of $84.90 per barrel in 2012, a 10.3% increase compared to 2011 when the price has averaged $65.40 per barrel.

The budget also includes a 3.3% increase on economic development spending and a 6.7% increase on social development spending over the 2011 budget, which includes 400 million pesos ($29 million) dedicated to health care, 56.5 billion pesos ($4 billion) for science and technology research and development, and 38 billion pesos ($2.7 billion) for roads and highways. By spending in these sectors, including its lucrative oil industry, the government hopes to boost growth for years to come without resorting to borrowing money that could increase the national deficit.