Mexico's new budget: fiscal miracle or a December disaster?
(Repeats Thursday story with no changes to text)
By Michael O'Boyle
MEXICO CITY, Dec 13 (Reuters) - Nervous bond holders will
pore over Mexico's budget like never before this weekend to see
if leftist President Andres Manuel Lopez Obrador can pull off
higher social spending, tax cuts and pricey oil ventures without
On Saturday, Lopez Obrador submits his 2019 budget to
lawmakers, with markets on tenterhooks to see how he will marry
his commitment to fiscal discipline to a long list of campaign
If he fails to convince the market he has a savings plan to
fund welfare programs and new infrastructure, it could deepen a
run on Mexican assets, and put Mexico on course for ratings
downgrades as early as next year, investors and analysts said.
"We are at a crossroads here where delivery is going to be
as important as the numbers themselves," said Andrew Stanners,
an emerging markets fund manager at Aberdeen Standard.
"The budget is going to be super scrutinized. If it is not
credible, then you have the international community that can
wobble on its commitment to Mexico."
The government must show it is ready to rein in spending if
its saving plans do not pan out as expected, Stanners added.
During the last two decades, global markets have warmed to
Mexico's U.S.-trained technocrats, who backed orthodox policies
and drew in a tide of investment to build up one of the world's
most liquid local-currency bond markets.
But Lopez Obrador has promised a radical break from that
era, which he has described as "neo-liberal" and which he blames
for widespread corruption.
Finance Minister Carlos Urzua has promised a budget with a
primary surplus of about 1 percent, excluding debt payments,
while his deputy, Arturo Herrera, has said the government will
use conservative economic estimates to realize its plan.
The big question is how they will achieve enough savings to
fund plans to boost spending on youth unemployment and the
elderly, plus major building projects that include a new oil
refinery and two rail lines in southern Mexico. Lopez Obrador
this week hinted that roll-out of the programs could be gradual.
His team has sought to court wary international investors.
However, debt yields have spiked since late October after he
used a straw poll to justify scrapping a partly-built $13
As the peso tanked following the decision, Lopez Obrador
declared that democracy, not markets, governed Mexico.
BELIEVING THE NUMBERS
Backed by the first outright majority in Congress in two
decades, Lopez Obrador is better placed to make bolder cuts in
discretionary spending than his predecessors.
"You need these strong-arm presidents to make the tough
decisions like this," said Aaron Gifford, an emerging markets
analyst at T. Rowe Price, calling the president a "fanatic" on
Lopez Obrador won office promising to root out graft,
claiming he could save billions of dollars. But analysts warn he
could worry investors if the budget projects significant gains
from such measures.
Already, public sector pay cuts he has ordered have been
temporarily frozen by the Supreme Court, raising questions about
his room for maneuver.
Questions also remain over the cost of his plan to lower
value-added tax and income tax along Mexico's northern border,
which he hopes will stem migration into the United States.
Private sector analysts calculate those tax cuts could cost
around 120 billion pesos ($6 billion).
If the administration's estimated gains in tax revenue
outstrip growth estimates, the market and rating agencies could
see them as unrealistic and react negatively.
On Thursday, Lopez Obrador said several arms of government
would receive higher spending, such as the military, which is
battling a record surge in violence.
Aside from pay reductions, he has not flagged where the cuts
will come. That will require close scrutiny of the budget.
"I don't think the market is going to completely believe the
fiscal responsibility of the Lopez Obrador administration until
they see the execution," said Ernesto Revilla, head of Latin
America economics at Citigroup. "Nobody is going to take their
eyes off of Mexico, even if the budget looks good."
(Reporting by Michael O'Boyle, Editing by Rosalba O'Brien)
First Published: 2018-12-14 00:46:29
Updated 2018-12-14 14:00:00
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