Mexico's Guide to Winning Friends and Influencing Credit RatingsBy
S&P and Fitch have improved nation’s outlook in recent months
Finance ministry set to present budget proposal on Friday
President Enrique Pena Nieto’s administration on Friday will release its 2018 budget proposal with a plan to bolster public finances and reassure investors.
In many ways, the hardest work is already completed.
In the past two months, both S&P Global Ratings and Fitch Ratings Ltd. raised their outlooks on Mexico to stable from negative, citing efforts by the government to stabilize the country’s debt burden. The moves also came after the threat of a severe disruption to Mexico’s trade relationship with the U.S. faded and the peso went from the world’s biggest loser to its most lucrative currency bet, relieving pressure on the nation’s external debt.
"The threat of a downgrade is not there anymore, so that should give the government and investors some relief," said Alonso Cervera, chief Latin America economist for Credit Suisse Group AG. "But that relief shouldn’t turn into complacency from the perspective of the authorities, and I trust that they are well aware of this."
Mexico plans to have a budget deficit of 2.5 percent of gross domestic product next year, Pena Nieto’s last in office, the narrowest planned since 2008. That’s wider than the 1.4 percent projected for this year, but it would have been 2.9 percent if not for a one-off transfer from the central bank due to the peso’s 2016 plunge. In 2014, the gap was 4.6 percent, the widest this century.
Mexico’s budget plan will call for a spending cut, but smaller than the reductions proposed for 2016 and 2017, according to the Finance Ministry. In a preliminary 2018 budget report in March, the Finance Ministry suggested it could cut programmed spending by 43.8 billion pesos, or 0.2 percent of GDP, from the level approved for 2017. That compares with a 1.5 percent reduction seen at the same point for this year’s budget and a 1.3 percent cut for 2016.
Read more: Bloomberg Intelligence Economics -- Mexico Country Primer
The budget deficit, rather than the actual debt level, is the most important metric for the nation’s policy makers, because it’s the one they can best control.
"The deficit is our anchor," Luis Madrazo, the finance ministry’s chief economist, said in an interview last month. On spending cuts, “it’s clear that we’ve turned the corner, but we’re not home yet. We need to make the final push."
With some help from the peso’s recent rebound, Mexico forecasts its broadest debt measure to drop to 48 percent of GDP from just above 50 percent at the end of 2016, and to be around that level in 2018.
Mexico is also on track this year to have its first primary surplus, a measure that excludes interest payments on debt, since 2008. Originally aiming for a 0.4 percent surplus, the central bank transfer will push that up to about 1.5 percent. Mexico will aim for a 2018 surplus of about 1 percent of GDP. Finance Minister Jose Antonio Meade has said that he will propose no changes in the nation’s taxes.
The government’s initial 2018 budget estimates assumed the peso would end 2017 at 19 per dollar and 19.1 in 2018. That’s now looking conservative, as the median forecast of economists surveyed by Bloomberg expect the peso to be at 18.15 per dollar next year. Mexico also is getting a boost from growth that has been better than many analysts expected shortly after Donald Trump’s election.
After the improved credit outlooks, the pressure is on Mexican authorities to deliver on the path of fiscal consolidation and follow through on their promises from earlier this year, said Benito Berber, the senior economist for Latin America at Nomura Holdings Inc.
“If they don’t continue on what they said they were going to do, then the probability of a downgrade would rise again,” he said.