Fitch Ratings’ Report For Mexico Warns Of Spending Cuts

Fitch Ratings warned that although the income from crude oil exports will increase Mexico’s GDP by 1.1 percent this year, the revenue will be eaten to sustain the government subsidies on fuel. Therefore, it is unlikely that the country will achieve the fiscal target of 3 percent Non-Financial Public Sector (NFPS) fiscal deficit. Instead, spending cuts may be required to reach the fiscal deficit set by the administration. 

The American credit rating agency recently analyzed the 2023 Preliminary General Economic Policy Guidelines (PCGPE) and reported that although the debt-to-GDP ratio should stand at 48 percent, “the persistence of a low economic performance drives debt toward a constant increasing pattern that is proportional to the GDP.”

Fitch confirmed that the higher oil revenues are due to the increase in fuel prices and that they will especially benefit PEMEX, though they will not be enough to make up for higher public expenditures, which will remain under pressure due to the increase in borrowing costs as well as debt indexed to inflation. As a result, the unrealistic growth projections and the lower economic performance could lead to the government having to choose between reaching its fiscal deficit or making spending cuts, according to Carlos Morales, Director of Latin American Sovereigns, Fitch Ratings.

As analysts have commented, the apparent benefits of revenues from the increase in oil prices are not as great a boon as they appear: “Oil prices are a double-sided sword for Mexico, because the country is a net importer of oil products,” said Alfredo Coutiño, Director of Analysis for Latin America, Moody's Analytics, to BNamericas. Reportedly, the government’s aid to PEMEX amounted to US$13.5 million, or 1.1 percent of the GDP of 2021, which shows its commitment to stabilize gas prices through direct subsidies.

Analysts from Fitch expect that “the public expenditure will be 1.2 percent of GDP higher than the budget for 2022, because of an increase in social spending and infrastructure projects such as the Mayan Train and the Isthmus of Tehuantepec, which represent 0.9 percent of the GDP.”

The PCGPE published on April 1 estimates the GDP in 2022 to grow between 1.4 percent and 3.4 percent, which sets the estimated growth to remain at 3.4 percent. This newer official assessment comes closer to the one that was made in Dec. 2021, which stood high at 4.1 percent but is also far from the 2 percent that Fitch expects.

However, some experts suggest otherwise, including Coutiño. “The current conditions for the global and domestic economies do not validate a growth rate of 3.4 percent for the Mexican economy … Particularly when the US estimate has been reduced to 3 percent and the US is the main engine for Mexican exports,” he said.

Moreover, the Ministry of Finance and Public Credit (SHCP)’s projection for 2023 is a GDP growth range of between 2.5 and 3.5 percent, which is slightly lower than the original range of between 2.9 and 3.9 percent.