Mexico & Nafta - 14 September 2004

The government sent its budget for 2005 to congress on 8 September. It expects growth next year to be only 3.8%, down from this year's likely 4.25%. The government is also being tough on spending, despite forecasting that oil prices would remain high and 2005 being the last year before a presidential election. It is aiming for a fiscal deficit of only 0.1% of GDP.  

The government set the budget for 2005 at M$1.74bn (US$151.6bn). The lower chamber of congress will have to approve the budget by the end of this year. According to the draft budget federal spending in 2005 will be 4.5% down on what was budgeted for this year. At a time when oil revenues are buoyant, and presidential and congressional elections are looming (they are due in 2006), the government's abstemiousness looks almost wilful. Whether congress will be able to restrain itself from backing some pet projects, and thus increasing spending, is doubtful.

The budget assumptions are that the economy will grow by 3.8% in 2005. This is an unambitious and disappointing target, given that the economy looks on course for 4%-plus growth this year. The main reason for the slowdown is that the US economy is forecast to grow by only 3.7% in 2005, down from 4.4% this year. The other macroeconomic targets are: inflation of 3% in 2005; a current account deficit of 2.1% of GDP (US$14.2bn) and an average oil export price of US$23 a barrel. The assumption for average oil export volume is 1.9m bpd. For 2004 the government assumed an average oil price of US$18.5 and exports of 1.85m bpd. The volume forecast is almost spot on, but the average price of Mexico's mix of crude oils is running at around US$29 per barrel. Overall, the budget calls for 6.3% cut in regular government spending; a 3.6% cut in welfare and other social spending and a 42% cut in the catch-all category of 'other federal spending'. The government claims that it is cutting bureaucratic spending by 12%.

President Vicente Fox said that the fiscal deficit target for 2005 will be 0.1% of GDP. In 2004 the government's target is a deficit of 0.3% of GDP, though congress allowed a budget with a deficit of 0.5% of GDP.  

Debt servicing payments in 2005 are scheduled to rise by almost 5% in 2005 to M$227.6bn (US$19.79bn), reflecting the switch in government borrowing from foreign to domestic capital markets. Ironically, the government may have been better advised to maintain its low-cost dollar debts rather than switch back into higher interest rate pesos.

In sending the budget to congress, the president pointed out that the bulk of the spending was cut three ways. He said that 25% would go on supporting the 19 federal government ministries. Another 35% would go on the big state-owned companies (such as Petróleos Mexicanos, the Comisión Federal de Electricidad, Luz y Fuerza del Centro and the two main social security funds, IMSS and ISSSTE. Balancing this, another 35% of the budget would be spent by states and municipalities.  

The government claims that despite the austerity of the budget, it is actually increasing welfare spending by 19%, as health, education, anti-poverty and rural development programmes are all getting more money. Anti-poverty programmes will have a budget of M$115bn (US$10bn) in 2005. This is 10% more than they got in 2004. The other big idea in the budget is the doubling of the money being spent by the federal government on law and order.