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Mexico Proposes Spending Increase of 2.5% for 2012 Budget

Mexican President Felipe Calderon’s government proposed to boost spending by 2.5 percent in real terms for next year, when Latin America’s second-biggest economy will elect a new head of state.

The Finance Ministry submitted yesterday a proposal to congress for 2012 spending of 3.62 trillion pesos ($290 billion) and no changes to the tax code, according to a presentation on the agency’s website.

The plan would create a budget deficit of 36.7 billion pesos, or 0.2 percent of the country gross domestic product, excluding investments in state-owned oil company Petroleos Mexicanos. This year’s proposed deficit was 42 billion pesos, or 0.3 percent of GDP. If approved, 2012 will be Mexico’s third consecutive year with a deficit.

By not including drastic changes, “the government took the safest road,” Sergio Luna, head of economic research at Citigroup Inc.’s Banamex unit in Mexico City, said in a telephone interview. “The budget seeks to minimize the level of controversy in congress.”

The initiative proposes 2012 total income of 3.28 trillion pesos with a forecast oil price of $84.9 a barrel. Taxes on oil sales provide about a third of Mexico’s government income.

The government is forecasting that growth will slow to 3.5 percent in 2012 after expanding 4 percent this year, according to the document. The peso will trade at an average of 11.9 per U.S. dollar this year and an average of 12.2 per dollar next year, according to the ministry.

“It’s a conservative and well-balanced proposal, coherent with fiscal discipline,” said Delia Paredes, chief economist at Grupo Financiero Banorte in a telephone interview from Mexico City.

The initiative seeks to “avoid a contagion from the confidence problems that are afflicting developed economies due to the irresponsible management of their finances and financial systems,” Finance Minister Ernesto Cordero said yesterday. He spoke in Mexico City after presenting the initiative to lawmakers.

Lowered Expectations

The government and economists have cut Mexican GDP forecasts in recent weeks on concerns the U.S. economy, which buys about 80 percent of Mexico’s exports, is losing steam.

Mexico’s economy will expand 3.9 percent in 2011 and 3.5 percent in 2012, according to the median estimates of a survey released by Citigroup Inc.’s Banamex unit Sept. 6. Economists had previously forecast 2011 growth of 3.95 percent and 2012 growth of 3.7 percent.

“Mexico needs an income law and spending budget that’s responsible and promotes economic growth and long-term social development,” Cordero said. “We can’t take any risks and we can’t make any mistakes.”

Banorte’s Paredes said the deficit could widen from the proposed amount following negotiations in Congress.

Debt Sales

To finance the deficit, the government plans 395 billion pesos of domestic debt sales next year and will favor domestic bond offerings, according to the ministry’s presentation. Mexico will sell $7 billion of debt overseas, the ministry said.

Security spending under Calderon’s plan would rise 10.7 percent to 147.2 billion pesos. Calderon vowed on Sept. 2 to continue fighting criminal groups until the end of his term.

Drug-gang violence has accelerated this year, including an arson attack on a casino that killed 52 people in Monterrey on Aug. 25. The death toll related to organized crime has surpassed 35,000 since Calderon took office in December 2006. The president’s six-year term ends Nov. 30, 2012.

The lower house of congress must approve the income portion of the budget by Oct. 20 and the spending portion by Nov. 15. The senate will have until Oct. 31 to approve the income portion of the budget.

Mexico will hold presidential elections in July next year.

The peso posted its first decline in three days yesterday, weakening 0.4 percent 12.5146 per U.S. dollar at 5 p.m. New York time, from 12.4638 yesterday. The benchmark IPC stock index fell 1.3 percent to 34,712.38.

Editors: Jonathan Roeder, Robert Jameson

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