Don’t say I didn’t warn you! In this space, we have insisted ad nauseam that the course of Mexico’s public finances is towards the abyss: it is not only a lie that the debt is not growing, or that the government has achieved multi-million dollar “savings” for the country. Quite the contrary.
President López Obrador has the largest public budget in history, and yes, it is in deficit. The spending is concentrated on pension payments, The President’s flagship projects such as the Tren Maya and the Dos Bocas refinery, debt repayment, and the “bailout” of Pemex.
The disaster is so evident that even the usually tardy and overly moderate sovereign risk rating agencies, research centers and various economic analysts have reinforced their warning about this very problem.
As you know, last week the Ministry of Finance presented the 2023 Economic Package, which contemplates a public expenditure of 8 trillion 299 thousand 647 million pesos, a real increase of 13 percent over the amount approved in the previous fiscal year.
The collateral problem is that the Bank of Mexico’s attempt to combat inflation by raising interest rates will continue to be insufficient to stop the fall in the purchasing power of Mexican families. There can be no end to rising prices if the government continues to spend money hand over fist!
Moody’s warned that the fiscal inheritance for the next administration will be complicated, due to the fact that President Andrés Manuel López Obrador has exhausted the government’s fiscal cushions. A fancy way of saying that they “ate” every last peso that was left over by the guardaditos (little guardians) from previous years.
One of the major concerns that the rating agency sees is that the global context is uncertain and the impact of inflation on interest rates and debt interest rates are risk factors for the sovereign rating.
“The fiscal room for maneuver that allowed the government to end the fiscal years with a fiscal deficit of three points of GDP is increasingly reduced, and has become a downside risk factor for the administration,” said Moody’s sovereign analyst for Mexico, Renzo Merino.
Merino also warned that the government’s projections are very optimistic and could affect Mexico’s credit rating in 2023 if the estimates are not met – and they will not be met because the country will not grow in a context in which the United States is heading towards a recession and the Federal Reserve is withdrawing liquidity from the economy at full speed!
Moody’s estimates that Mexico will grow close to 1 percent next year, and not the 3 percent proposed by the Treasury, which could complicate finances on the revenue side.
For its part, the Centro de Investigación Económica y Presupuestaria (CIEP) pointed out that the Treasury’s package is not responsible, balanced or realistic, so there is a risk of spending cuts and higher indebtedness, since pension payments and the financial cost of the debt alone represent 8.8 percent of the GDP and the entire income tax collection would not be enough to pay for this.
Another think tank that harshly criticized the allocation of public spending was the Center for Economic Studies of the Private Sector (CEESP), which added its concern about the sustainability of public finances for the coming year.
“Even with the expected strong increase in revenues, resources will not be enough to cover the growing needs of public spending, especially to maintain social programs in operation and the government’s flagship projects,” said the CEESP.
This list of research centers is joined by analysts from banks such as Citibanamex and Goldman Sachs – among others, but all agree that public finances are at risk of getting out of the government’s hands.
And rightly so! The Tren Maya will be granted almost double the budget in 2023, while the Dos Bocas refinery will be injected with almost 50 billion pesos more; and 40 percent more resources will be allocated to the purchase of sympathies – excuse me – “aid” for the elderly.
To put it in plain English and leave no room for doubt: Mexico is heading for a fiscal debacle not seen in 30 years, the peso is overvalued against the dollar and inflation will remain out of control for years if the government does not tie its hands on spending (and it will not do so in view of the 2023 and 2024 elections).
The time to get ready is now. It will not do to say later that “it could not have been known” ahead of time that this ship was going to sink.