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Mexican President Promises Surplus in 2019 Budget Proposal

Mexican President Promises Surplus in 2019 Budget Proposal

(Bloomberg) -- Mexican President Andres Manuel Lopez Obrador on Saturday sent Congress his 2019 budget plan, which includes more spending on social programs and infrastructure, while still preserving the fiscal framework established by his predecessors.

Lopez Obrador, who took office on Dec. 1, proposed a primary surplus of 1 percent of gross domestic product for next year and his administration expects this year’s surplus to be about 0.8 percent, Finance Minister Carlos Urzua told lawmakers at the lower house. AMLO, as the president is known, has long promised to pay for increased spending on pensions, education and infrastructure by a cost-cutting campaign that many investors suspect is unfeasible.

Mexican President Promises Surplus in 2019 Budget Proposal

The 65-year-old leader roiled markets even before taking office by canceling a partially-built Mexico City airport, sending the peso, stocks and bonds tumbling. It will be important to monitor the government’s follow through on the budget commitments next year, because if faced with revenue that doesn’t meet his goals, Lopez Obrador may prioritize social spending and development plans over fiscal responsibility, said Alberto Ramos, an economist at Goldman Sachs Group Inc.

“The underlying macroeconomic assumptions seem reasonable,” Ramos said on Saturday. “I don’t see anything that comes across as utterly unrealistic at first glance. But the budget is just a piece of paper. The real question is ‘What’s the commitment to the target?”

Key Insights

  • Budget includes assumptions of 2 percent growth, 3.4 percent inflation, peso exchange rate at 20 per dollar, oil production of 1.847 million barrels per day, and average export price for Mexican crude of $55 per barrel
  • Financing requirements of the public sector, known as RFSP, forecast to be a deficit of 2.5 percent of GDP, meaning that the broadest measure of debt to GDP will remain near 45 percent
  • Urzua said that the lowering of income tax and value-added tax in U.S. border states, a campaign and transition promise by Lopez Obrador, will be implemented via decree, which the government estimates will reduce revenue by 40 billion pesos ($2 billion)
  • Lawmakers have until Dec. 31 to pass the budget
What analysts are saying
  • The budget as proposed "would be enough to maintain the current debt to GDP ratio close to 46-47%. Results are consistent with a total public sector deficit of 2.5% of GDP. Macro assumptions for 2019 of GDP growth of 2.0%, year-end inflation of 3.4% and average oil price of $55 per barrel for the Mexico export basket are all in-line with broad consensus expectations and central bank forecasts and are unlikely to raise concerns." -- Felipe Hernandez, Bloomberg Economics
  • "On the expenditures side, it looks like some of the programs will be rolled out only partially in 2019, which helps contain spending pressures for now. On the assumptions, markets will likely question the projection of 2 percent real GDP growth (too high?) and of an average exchange rate of 20.0 pesos per dollar (too strong?)" -- Alonso Cervera, managing director of emerging market research for Credit Suisse Group AG

Get More

For more, see our Mexico Forecast Summary

To contact the reporter on this story: Eric Martin in Mexico City at emartin21@bloomberg.net

To contact the editor responsible for this story: Vivianne Rodrigues at vrodrigues3@bloomberg.net

©2018 Bloomberg L.P.