Coronavirus-battered Mexico to present tight 2021 budget

MEXICO CITY, Sept 8 (Reuters) – Mexico faces an onerous balancing act in its 2021 budget: reviving an economy severely battered by the coronavirus pandemic while sticking to the austerity promises of President Andres Manuel Lopez Obrador.

When finance ministry officials present a draft budget to the lower house of Congress later on Tuesday, investors in both Mexico and the debt of its ailing state oil company Petroleos Mexicanos will scrutinize spending priorities.

Lopez Obrador is an outlier among both wealthy and emerging nations, insisting on tight spending limits even in the face of the economic destruction wrought by the coronavirus lockdown.

The economy he promised to revive is in the deepest slump since the 1930s Great Depression. Mexico’s central bank recently warned it could contract by 13% this year.

While regional peer Brazil has splurged an additional 6.5% of GDP on spending including unemployment benefits that reach a third of its citizens, Mexico’s spending balance has deteriorated by less than 1% during the pandemic.

Lopez Obrador has given no sign of changing course, arguing his discipline will leave healthier finances when the dust settles, while ruling out more taxes or new social programs.

Carlos Serrano, an influential Mexican economist at the country’s largest bank, BBVA, said a counter-cyclical fiscal policy would be more suited now.

“It’s not the moment for fiscal austerity,” Serrano said in an interview. “It should be accompanied by the announcement of fiscal reforms that will take effect once the pandemic crisis is over and that will finance additional spending.”

Erasmo Gonzalez, who chairs the lower house budget committee, told Reuters there would be a primary deficit in 2021, without going into detail. Budget guidelines released earlier this year projected a primary deficit of 0.6% of GDP.

Mexico was already in a mild recession before the pandemic.

In the central bank’s most optimistic scenario, Latin America’s second-largest economy will be smaller at the end of next year than before the pandemic roiled the Americas. It might only make a full recovery in 2022.

Even without additional borrowing, the government’s debt to GDP ratio has risen by more than 10 basis points as the economy shrank and the peso weakened.

Ratings agencies, which stripped Pemex of investment grade this year and have warned Mexico’s sovereign debt could suffer the same fate, are watching for signs of future fiscal reform and strategies to rein in the oil company’s debt.

Lisa Schineller, lead analyst for Latin America at Standard & Poor’s, said that as well as its usual focus on the fiscal outcomes of the budget, the agency was very interested in plans for recovery from the impact of coronavirus.

“We also want to see … what will be the post-pandemic response,” she said in an interview. (Reporting by Stefanie Eschenbacher; Additional reporting by Sharay Angulo and Abraham Gonzalez; Editing by Frank Jack Daniel and Christopher Cushing)

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