Mexico's Fiscal Crisis Demands Action

But it is unclear whether the government will agree to necessary tax increases and budget cuts.

Mexico’s public finances have been heavily oil dependent since the late 1970s. Deep recession has caused non-oil revenues to plunge as oil production falls steeply. Urgent measures are required to address a fiscal crisis that erupted practically overnight. It is unclear whether Congress will agree to necessary tax increases and budget cuts.

Revenue shortfall. The combined fall in oil and non-oil revenues has proved lethal for public finances. The total, 480 billion pesos, is equivalent to 4.2% of gross domestic product. The amount partially is offset because fiscal transfers to states and municipal governments are tied to revenue, and have fallen. However, the fiscal gap still totals 421 billion pesos.

The government will maintain its 2009 target of a balanced budget–excluding Pemex infrastructure investments–but only through expenditure cuts and (mainly) one-off revenues. The figures Finance Minister Agustin Carstens presented to a Senate committee on Aug. 10 probably aimed to cause alarm and urgency. His message was clear:

–Actions are needed to increase revenues and slash spending; the former probably by increasing the level and/or scope of taxes.

–Otherwise, the fiscal gap for 2010 will be about 300 billion pesos (equivalent to 2.7% of GDP)–4-5% of GDP including Pemex infrastructure investment.

–It is unclear whether domestic investors, particularly international capital markets, would be willing to finance this without a significant premium.

Oxford Analytica