At the beginning of July, one of the world’s most important rating agencies cut Mexico’s sovereign rating, citing the government’s fiscal policy as one of the main risks to pay attention to. The figures of the Ministry of Finance for the first half of the year already show signs of concern and anticipate the inevitable crisis that we are getting closer to every day.
Different analysts have been writing and commenting on this issue for quite some time.
Macario Schettino, for example, wrote last week in his column in El Financiero that the fiscal crisis he had been warning about for months now seems to be a reality, a situation that Lopez Obrador’s government wants to cover up with false austerity policies (the so-called “Franciscan poverty”).
Macario pointed out that for some time specialists had already seen a fiscal crisis coming to the country, but what they could not agree on was the date when it would occur. In his opinion, we are already in that fiscal crisis, although for some it is not yet evident.
The most recent Treasury statistics, available as of June, reveal the following:
– In 2022 the public deficit is estimated to reach a level of 3.8 percent of GDP, higher than the 3.5 percent originally forecast.
– The country’s total debt stood at 45.7 percent of GDP as of June 2022 and the outlook is for it to rise to 48.8 percent, according to the ministry itself.
“My conclusion is that the fiscal crisis will not happen in the near future. The fiscal crisis is already with us. We just need to recognize it, but there is no way out,” Schettino wrote, warning that a fiscal crisis occurs when the deficit in public finances clearly exceeds 3 percent of GDP, as it is expected to be 3.8 percent of GDP at the end of 2022, with an increasing trajectory over time.
Schettino explains that Mexico has a public debt very close to the reasonable limit due to its poor collection level, so in three years with that level of deficit the scenario would be complicated. It is true.
“In the last 18 months we have been very close to 3 percent (public deficit), but apparently without a problem. The reason, however, is an extraordinary contraction in government spending,” he says.
To reach that conclusion Macario considered the federal government’s programmable spending, discounting the payment of pensions and the transfers the government makes to Pemex. With this adjustment, that spending between 2000 and 2018 averaged 10 percent of GDP, which is quite small to provide quality education, health and public safety in a country as large as Mexico. Now, that spending as of the first half of 2022 is at 9.1 percent of GDP.
That is to say: “Franciscan poverty” is nothing more than a mere euphemism for what is simply taking the budget away from the people’s priorities (more and better public services, security, education, health, infrastructure, etc.) in order to allocate it to the president’s ideological ideas: the Mayan Train, the Dos Bocas refinery, the “rescue” of two bankrupt companies (Pemex and CFE), the “humanitarian aid” to Cuba, etc.
Thus, in order to squander on what López Obrador thinks is best, the government has reduced spending in Agriculture by 40 percent; in Communications and Transportation by 60 percent; in Economy by 80 percent; in Justice by 15 percent; in Public Security by 35 percent; in Education by 12 percent, while the budgets for Energy, Labor, Welfare and his “star” projects continue to grow.
In Schettino’s opinion, the government has two options to recover spending: eliminate the transfers (gifts of money it makes) to Pemex or be “transparent” with the deficit, which would be around 4 percent of GDP. Neither will happen.
Thus, the problem is very serious because in the first place AMLO will never take away Pemex’s budget and in fact none of his personal projects, no matter how unfeasible and unsustainable they may be financially. And secondly, recognizing the deficit would cause the loss of the so-called “investment grade”.
The latter is in fact already irrelevant.
As we have warned in this space, rating agencies are often wrong to err on the side of conservatism when it comes to warning investors about the real risks of issuers. Mexico, in fact, should already be in “junk grade” due to its structural weaknesses in public finances, which indicates high risk for investors, despite the fact that the rating agencies inexplicably give it a “stable” outlook.
As Macario concludes: “Without doing anything, simply because of pensions, the deficiencies of Pemex and CFE, structural spending, inertia and the impact of rising interest rates, the public deficit would be 5 percent by 2023 and almost 6 percent by 2024, simply by maintaining programmable spending equivalent to the average from 2000 to 2018”.
It is in this context that those who continue to trust in the country’s economic “right course” are making a serious mistake.
While this writer disagrees that the fiscal crisis “is already here”, we must say that it is inevitable and as such, the “bomb” will not explode in the eyes of all when it is too late.
If you are old enough to remember what happened during the triumphalist six-year term of Carlos Salinas de Gortari, think about what happened afterwards (the great economic crisis that triggered the so-called “Tequila effect”) and you will have an idea of what lies ahead.
This includes investors who continue to bet their capital in peso-denominated domestic assets. Don’t be one of them and seek refuge, or you will see your wealth vanish between your hands in the next few years. The time to prepare is NOW, not when the dollar is at new all-time highs and it is too late.
