Paquete Económico 2017

http://bit.ly/1e3iCuh

 

– La Secretaría de Hacienda y Crédito Público (SHCP) entregó al Congreso la propuesta de Paquete Económico para 2017. De acuerdo a lo esperado, el programa prioriza la consolidación de las finanzas públicas, al incluir un superávit primario mayor al anunciado inicialmente.

 

– Alexis Milo, Economista en Jefe de HSBC, señala que «el escenario macroeconómico luce realista al incorporar una expectativa de crecimiento de entre 2.0% y 3.0% para 2017, en línea con las expectativas del mercado. De igual manera, se espera que la inflación cierre el año dentro del objetivo de Banxico y que el tipo de cambio termine en 18.20 pesos por dolar. Asimismo, se propone una liberalización gradual del precio de combustibles, aunque no se especifican mayores detalles».

 

– El gobierno pretende estabilizar las finanzas públicas al proponer un déficit de 2.9% del PIB, ligeramente menor al contemplado anteriormente, lo que llevaría el saldo histórico de los Requerimientos del Sector Público a 50.2% del PIB de 50.5% esperado para 2016. La propuesta se discutirá en el Congreso para su aprobación. La Ley de Ingresos deberá ser aprobada antes del 31 de Octubre, mientras que el Presupuesto de Egresos deberá hacerlo antes de mediados de Noviembre.

 

HSBC Global Research

 

Economics

09 September 2016

 

 

Mexico

 

2017 Economic Program: Eyes on a credible fiscal adjustment

 

The Ministry of Finance sent the Economic Program proposal for 2017 to Congress for discussion and approval. The package encompasses the Revenues Law, the Federal Budget and the General Economic Policy Guidelines, which contain the macroeconomic and public finances outlook for year-end 2016 and 2017. As expected, the package for 2017 prioritizes a consolidation of public finances, highlighting a primary surplus, which could be reached through a combination of increased revenues and budget cuts. As anticipated, the proposal does not contain new taxes. According to the Law, the revenues proposal has to be approved by Congress before October and the budget before mid-November, thus completing the legislative process. We anticipate a relatively smooth process, as we perceive a conservative economic framework that supports the consolidation of public finances, which is more likely to enjoy a light opposition.

 

Facts

 

In general terms, we think that the Economic Program for 2017 submitted to Congress went beyond expectations as it outlines a conservative macroeconomic framework and it goes for a tighter fiscal adjustment than originally expected. The following aspects stand out:

 

The official GDP growth forecast for next year is a range from 2.0% to 3.0% y-o-y. It is worth noticing that the official forecast is roughly in line with the market’s consensus forecast, which is at 2.5% y-o-y, according to the latest Banamex survey.

The MXN-USD exchange rate is expected to average 18.20 in 2017, a moderate real appreciation with respect to current levels and a conservative scenario in the context of a highly volatile exchange rate. This is also roughly in line with the market consensus and entails a fiscal effort aimed at containing the increase in dollar-denominated debt.

The program proposes a gradual liberalization of the price of fuels. However, no further details are provided on this measure.

The Mexican crude-oil mix price assumed in the budget is expected to average 42 dollars per barrel. As announced by the Ministry of Finance in the last weeks, such minimum price is assured in terms of revenues by financial hedges obtained by the government at 38 dollars per barrel and the remainder by resources deposited in the oil stabilization fund. By the same token, the Economic Program projects the average oil production at 1,928 thousand barrels per day in 2017, a conservative assumption considering that it is 9.5% below the level set in the program for 2016.

Total net public spending will diminish 1.7% in real terms with respect to the original budget for 2016, which amounts to 1.2% of GDP and is intended to be permanent. Given that budget cuts in 2016 with respect to the original proposal amount to MXN$170bn, the additional budget cuts in 2017 are relatively small (MXN$70bn), so they seem attainable.

The combination of growing revenues and the proposed budget cuts are expected to reduce the public deficit. The Public Sector Borrowing Requirements (PSBR), a measure of the broad deficit which includes Pemex and other entities, are defined at 2.9% of GDP for next year (slightly below the preliminary proposal announced by the Ministry of Finance three weeks before at 3.0% of GDP). This implies a primary surplus, total public balance excluding financing costs, of 0.4% of GDP (larger than the originally proposed of 0.2% of GDP). Growth assumptions and the primary surplus proposed is expected to stabilize the debt-to-GDP ratio around 50% in 2017.

Expected Mexican oil price at USD42 per barrel

 

Source: Ministry of Finance

Oil and non-oil revenues

 

Source: Ministry of Finance

 

 

Implications

 

In general terms, we see that the Economic Program for 2017 went beyond expectations in terms of the conservative assumptions for the macroeconomic framework and the proposed fiscal adjustment. Regarding GDP growth, the program assumes but only a moderate acceleration of the Mexican economy with respect to 2016, thus making credible that the increase in tax revenues will be met and that the debt-to-GDP ratio will stabilize next year.

 

Given that oil prices remain relatively volatile and the Mexican crude oil mix has rarely gone above 40 dollars per barrel this year, the level assumed in the budget may add to risks significantly if it were not hedged. In this regard and given current spot prices at around 38 dollars per barrel, the Program leaves some upside risks for oil revenues if the upward trend of prices seen throughout 2016 continues next year. By the same token, crude oil production is expected to shrink from 2,130 to 1,928 thousand barrels per day, the largest drop projected in any yearly program. Nevertheless, the budgeted oil price and production assumptions for 2017 imply a significant fiscal effort as the program for 2016 contained a higher price (49 dollars per barrel) and a larger production. All in all, oil revenues are projected at 17.9% of total revenues so the program aims at a reduction in the dependence of public finances on oil prices.

 

As we anticipated, increased market’s concerns with respect to public finances probably led the government to deliver a stronger fiscal adjustment. In this regard, aiming at a larger primary surplus than the originally proposed is likely to surprise markets positively. Moreover, a conservative assumption about growth next year makes the intended stabilization of the debt-to-GDP ratio more credible and thus addresses the market’s concerns about the fast expansion of such ratio. In our view, even if budget cuts are taken with a grain of salt, revenues from income and excise energy taxes are likely to make the capacity to meet the fiscal targets more credible.

 

Finally, it is worth remembering that this proposal has yet to be discussed and voted in Congress, so the revenues proposal has to be approved before October and the budget before mid-November, thus completing the legislative process. Even though the political environment in Mexico has been heated in the last months, we anticipate a relatively smooth process in Congress for the 2017 Economic Program for two reasons. Firstly, increased concerns about the deterioration of the fiscal stance are likely to permeate into Congress and create incentives for the opposition parties to support a more frugal budget. Secondly, the recent changes in the cabinet may lead to a refreshed communication between the current administration and Congress, thus avoiding discussions that may lead to substantial modifications to the Program.

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