Mexico's proposed budget would lower spending and maintain a path of
fiscal consolidation despite downward pressure on oil revenues, Fitch
Ratings says. Overall, we believe Mexico's proactive response to lower
oil income is prudent, especially in light of the difficult external
environment and continued weakness and volatility in the oil markets.
The proposed budget cuts are in line with our expectations and growth is
forecast within the range projected when Fitch affirmed Mexico's rating
with a stable outlook in July.
The proposed budget sees Mexico's 2016 growth rate in the range of
2.6%-3.6%. Fitch forecasts 2.5% growth in 2015; we believe it could pick
up to average above 3% in 2016-2017 on stronger external demand, real
exchange rate depreciation, and some progress in implementing economic
reforms. Downside risks to growth remain and could emerge from higher
domestic financial volatility due to US Fed tightening, further
contraction in oil output, and failure of investment and confidence to
recover materially.
Spending cuts are central to the proposed budget and the government has
been working toward implementing a zero-base budgeting approach to
improve operational efficiency and reduce costs. The budget includes a
cut of MXN133.8 billion (around 0.7% of GDP) in 2016. These cuts come on
top of the MXN124.3 billion (0.7% of GDP) spending cuts in 2015,
highlighting the government's commitment to adjust to the new economic
environment. However, implementation risks remain.
The proposed budget includes a 0.5% reduction in the nonfinancial public
sector (NFPS) deficit, compared to the estimated results for 2015. In
our view, this is in line with a gradual fiscal consolidation embedded
in the government's medium-term fiscal targets. The non-financial sector
deficit including investment outlay of productive state enterprises is
forecast to decline to 3% of GDP in 2016 from an estimated 3.5% this
year. Excluding such investments, the NFPS deficit is targeted to reach
0.5% of GDP in 2016, compared to 1% in 2015.
The budget projects that overall revenues will fall by 0.2% in real
terms in 2016 (compared to the 2015 budget) as oil income contracts and
is largely offset by the expected growth in non-oil revenues. No new
taxes are proposed. Oil revenues are projected to fall by 30% in real
terms compared to the 2015 budget due to the dual headwinds of low oil
prices and reduced oil production. The budget assumes oil production
platform of 2.25 million barrels per day, down from 2.4 million assumed
in the 2015 budget.
A faster drop in oil production remains a risk. The oil price assumption
included in the budget is USD50 per barrel for the Mexican oil mix and
the federal government has hedged its net oil exposure at USD49 per
barrel using put options costing around USD1 billion. The remaining
difference of USD1 per barrel is covered with a secondary account of
MXN3.7 billion within the oil stabilization fund. As such, the oil hedge
combined with resources in this secondary account protect Mexico's
federal government revenues from lower than budgeted prices.
Mexico's economic growth continues to constrain its credit profile as it
remains relatively weak compared to its rating peers and some large
emerging markets. In addition, the government's narrow revenue base,
heavy though declining dependence of public-sector revenue on oil
income, and limited fiscal buffers are the main structural weaknesses of
the country's public finances.
Additional information is available on www.fitchratings.com.
The above article originally appeared as a post on the Fitch Wire credit
market commentary page. The original article, which may include
hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com.
All opinions expressed are those of Fitch Ratings.
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View source version on businesswire.com: http://www.businesswire.com/news/home/20150911005667/en/
Copyright Business Wire 2015
Source: Business Wire
(September 11, 2015 - 12:01 PM EDT)
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