Mexico Finance Chief, Tested ‘Every Day,’ Pledges Budget Surplusby and
Nation to narrow 2016 deficit forecast Monday, Videgaray says
Pemex ‘certainly not’ needing another cash transfer this year
Mexico Finance Minister Luis Videgaray is doubling down on his pledge to send Congress a 2017 budget with a primary surplus next month, saying the government needs to make good on its promise because its credibility is constantly being tested.
Speaking in his office in Mexico City’s 16th century National Palace on Thursday, Videgaray said the nation needs to restore fiscal balance after eight years of budget deficits since the 2008 global financial crisis.
In an interview that touched on everything from global monetary policy to anti-globalization rhetoric in the U.S. presidential campaign, Videgaray said Mexican policy makers need to work pretty much every day to earn credibility from markets. He rejected the suggestion that the country could take advantage of low interest rates to increase borrowing, continue running a deficit and increase public spending to counter slowing economic growth.
"Absolutely not! We’re not delaying," Videgaray said. "There’s a big difference in policy making in countries with advanced economies that have a reserve currency that can finance a public deficit or a current account deficit to a country that doesn’t have that, that needs to earn its credibility basically every day."
Selloffs this year in Mexico’s currency have forced policy makers to respond with interest-rate increases and spending cuts to reassure investors about the nation’s economic management, protect it against inflation and prevent further market instability. Traders often use the peso, the most actively-traded currency in emerging markets, to hedge against other risks, which in turn makes the currency more vulnerable to price swings.
After the peso neared 20 per dollar in February, the central bank responded with a surprise rate hike between scheduled meetings and the government announced a spending reduction. Policy makers also changed the format of their dollar sales designed to bolster the currency, saying the previous system was too predictable and being gamed by traders. When the U.K.´s vote to leave the European Union again sent the peso into freefall in June, policy makers responded with another cut in outlays.
In March, Moody’s Investors Service reduced its outlook for Mexico’s credit rating to negative from stable, citing the burden of government financial support for state oil company Petroleos Mexicanos, known as Pemex. The government followed with a cash injection to help the company pay suppliers.
The peso has fallen 6.1 percent this year, the worst performance among 16 major currencies after the British pound. It weakened 0.8 percent to 18.3291 per dollar on Friday.
As the conversation turned to the U.S., Mexico’s primary export market and partner in the trade deal known as Nafta, Videgaray talked about how an increasingly globalized world is shattering long-held views about economies’ ending at a nation’s borders. As an example, he cited the Federal Reserve’s mention of concerns about Italian banks in minutes released this week.
"That’s something that just 10 years ago would’ve been totally out of place, and now it’s a reality," he said. "We see monetary policy in the U.S. constrained by what’s happening in the rest of the world."
Mexico´s Finance Ministry on Monday will update its 2016 budget balance forecast and announce a narrower deficit projection, given that is used 167 billion pesos ($9.2 billion) from a central bank surplus to buy back debt and reduce bond issuance. It currently predicts a 3.5 percent deficit for the broadest measure of debt, which includes investment in Pemex. The national statistics institute is scheduled to release final gross domestic product data for the second quarter on Monday, and the government typically releases updated forecasts once that information is available.
Videgaray said Mexico is committed to stabilizing its level of debt to GDP at close to 50 percent, though it could fluctuate around that number based on the peso’s value versus the dollar. Mexico’s debt climbed to 46.9 percent of GDP in the second quarter. President Enrique Pena Nieto, who is limited to a single six-year term, pushed a tax increase through Congress in his first year in office, and the government has pledged not to raise taxes again before he leaves office in 2018.
Videgaray said Pemex will "certainly not" need additional capital transfers this year beyond the government’s already-announced tax break, cash injection and plans to help reduce the company’s pension liabilities. Pemex’s debt has reached historic levels amid weak oil prices and 11 straight years of declining crude output. Low oil production forced the government to cut its forecast for growth this year to 2.2 percent to 3.2 percent and helped send the peso to its repeated record lows.
Videgaray, 48, who holds a doctorate in economics from the Massachusetts Institute of Technology, has been Mexico’s Finance Minister since President Pena Nieto took office in 2012. He helped shepherd the oil law through Congress in 2013 to open the nation’s state-controlled oil industry to private drillers for the first time in 75 years. He previously served as Pena Nieto’s finance chief when the president was governor of the State of Mexico, which borders the nation’s capital, and twice refinanced the state’s debt.
The world economy is changing, Videgaray said, and advances in technology, rather than trade, are largely responsible for disruptions and evolution of industries like manufacturing.
The economies that will do well in the future are those oriented around markets and easy asset reallocation, he said, pointing to China as a nation that will face obstacles.
"Those economies that are not truly market economies are going to struggle doing that," he said. "What I like about some of the changes that have happened in Mexico is they introduced market flexibility, like in the labor market, energy, telecom, financing. That’s going to be the most important quality of the economy -- flexibility."
At the end of the interview, Videgaray walked Bloomberg journalists to an antique elevator in a corner of his office adorned with intricate black metalwork that dates from the turn of the 20th century. On the ground floor, he passed a wall with the painted portraits of all Mexico’s finance ministers of the last 100 years.
Videgaray said that when a finance minister leaves office, their portrait is added, and they get to take home the Mexican flag that stands in a corner of their office.
When will Videgaray take home his flag? He wouldn’t venture a guess.
"I don’t know," he said. "It could be tomorrow, or it could be in 2018. Thankfully that’s not a decision that’s up to me, so I don’t worry about it."