Mexico Says Walmart Tax Deal Helps Reach Unexpected Surplus

Mexico turned its forecast for a primary deficit into a surplus this year thanks in part to tax agreements with companies like Walmart Inc.’s local business, Deputy Finance Minister Gabriel Yorio said.

“We identified that we have more slack,” Yorio said about the country’s fiscal policy in an interview from the National Palace in Mexico City on Thursday. “We had the additional collection from the tax authorities with respect to funds you know about, like Walmart, and others.”

A proposal to transfer public trusts to the Finance Ministry and to draw from the country’s stabilization funds also helped the nation flip its projection to a 0.2% primary surplus, excluding interest payments, Yorio said. The unexpected surplus, reported in the government’s 2021 budget proposal this week, compares to a 0.6% primary deficit predicted in April.

Mexico Says Walmart Tax Deal Helps Reach Unexpected Surplus

While most countries around the world have been carrying out fiscal stimulus this year as the pandemic wrecked their economies, Mexico has been tightening its budget and cracking down on large firms that owe back taxes to add over $1 billion in revenue from settlements. Just this week BBVA Bancomer agreed to pay around $150 million, and Walmart de Mexico SAB coughed up $370 million earlier in the year.

By comparison, Brazil, Latin America’s largest economy, is expected to post a primary deficit of about 12% of gross domestic product this year.

Economists say Mexico’s focus on austerity and tax collection rather than government spending will only deepen its recession. The country’s GDP is seen falling about 10% this year, among the worst in the region.

A weakening peso and dwindling economy have undermined the government’s attempts at austerity, swelling Mexico’s debt burden from an expected 45.6% of GDP to 54.7% this year. While he doesn’t expect Mexico to lose its investment grade, Yorio said that ratio reaching 60% “would put the country’s credit rating at risk,” Yorio said, adding that the Finance Ministry is in regular contact with ratings agencies.

“Obviously there’s been a level of downward revisions at a global level,” he said. “That indicates that there exists a risk that they continue with these adjustments.”

Despite the government expecting to be relatively flush this year, Yorio said he doesn’t see Mexico having the funds to provide additional aid to heavily indebted state-owned oil company Petroleos Mexicanos, including any further reduction on the company’s tax bill as done in the past.

“We don’t see at this time more aid than what we’ve already given with past capitalizations, reduced royalties,” and liability management, Yorio said.

Extra Cut

The deputy minister said that given inflation’s recent acceleration - it’s now just above the 4% upper limit of policy makers’ target range - he only sees one more central bank interest rate cut, before it ends an easing cycle that has brought borrowing costs down to a four-year low.

Although real interest rates, meaning adjusted by inflation, are still high, more cuts could drive away investors, Yorio said.

“There are risks, for example, of adjustments to portfolios. So it seems that we’re now approaching the floor,” he said about the key rate. “There will be maybe one last adjustment. That’s my perception, my reading.”

Banxico, as the central bank is known, has slashed borrowing costs by half a point after each of its past five policy meetings to 4.5% as it grapples with an economy hammered by the coronavirus pandemic. The government included a 4% interest rate forecast in the budget proposal “assuming space for further reductions during 2020.”

The new appointment to Banxico’s five-person board, who will take over early next year, is likely be a woman, he also said during the interview.

Yorio declined to say whether the ministry will hedge oil prices for 2021, after doing so for almost two decades. He said such a move would depend on the markets and on volatility, declining to comment further.

Since 2001, Mexico has locked in its oil revenue almost each year via put options it buys from a small group of investment banks and oil companies in what’s considered Wall Street’s largest - and most closely guarded - annual oil deal.

©2020 Bloomberg L.P.

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