By Jorge Amato
Head - Latin America Investment Strategy
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As we expected, Mexico’s 2019 budget was well received by currency markets, though a global risk-off environment dragged local equities lower
Plans for Mexico’s 2019 budget, which President Lopez Obrador (AMLO) sent to Congress on Saturday, propose a modest increase in spending while aiming to maintain the country’s primary surplus at around 1% of GDP. Following the left-wing populist’s ambitious election campaign which involved promises of big spending on infrastructure and social programs, observers had feared that AMLO’s first budget would break from Mexico’s tradition of fiscal prudence.
Largely to the contrary, Finance Minister Urzua made clear during his budget presentation over the weekend that the government was trying to be very conservative in its spending estimates. Revenue projections, while somewhat optimistic, are not unreasonable if the domestic and global economic backdrop remains supportive.
On the spending side, promised initiatives like a worker apprenticeship program, a tourist train through the Yucatán peninsula, and free public internet were all earmarked at lower spending levels than had been initially promised during and in the aftermath of the campaign. The government will also provide Pemex with $2.5 billion to build a new refinery in Tabasco.
An expected increase in revenues of 3.8% YoY may be a bit generous given expectations of only 2% GDP growth, especially since the government plans to cut value-added and corporate income taxes in the region near the US border. The drop in collections from these tax cuts is likely to be larger than the $2 billion estimated by the Finance Ministry. AMLO has also promised to increase revenues by reducing corruption in the awarding of new government contracts and by making tax collection more efficient, though he has provided no further guidelines into how this will be achieved.
The budget assumes 2% GDP growth, 3.4% inflation, a peso at 20, and $55 oil prices, all realistic assumptions in our view. Congress must approve the budget by year-end, a process that shouldn’t be too controversial given the Morena party’s healthy majority in the both chambers. This budget will likely keep rating agencies happy for the time being, and the focus will shift to execution. The Mexican peso traded stronger in its first session since the budget was released, though local equity markets fell amid a global, risk-off environment on Monday.