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Mexico Defends Budget Plans as Growth Forecast Comes Under Fire

Mexico's Finance Minister Arturo Herrera presents the 2020 national budget to Laura Angelica Rojas, president of the Lower House of Congress, at the Congress building in Mexico City, Mexico, Sept. 8, 2019.

Mexico's finance minister defended the 2020 budget proposal Monday, insisting that his tax revenue and spending projections are credible, despite concerns that the underlying forecasts for growth and oil output are overly optimistic.

President Andres Manuel Lopez Obrador's second budget since winning office last year aims to boost spending on welfare programs, security and state oil company Pemex, while also eschewing new taxes or fuel price hikes.

FILE - Mexico's President Andres Manuel Lopez Obrador gestures during an official event in Sabinas, in Coahuila state, Mexico, May 4, 2019.
FILE - Mexico's President Andres Manuel Lopez Obrador gestures during an official event in Sabinas, in Coahuila state, Mexico, May 4, 2019.

"We have presented a realistic budget, without underestimating income or expenditures," Finance Minister Arturo Herrera told a news conference. "For a very long period, income was underestimated in a more or less systematic way, so that there was always surplus income at the end of the year."

The administration cautiously freed up more funds for spending, targeting a primary fiscal surplus of 0.7% of gross domestic product (GDP). The figure was less ambitious than earlier targets, but feasible in the view of economists.

There was less confidence in Herrera's forecast that Mexico could achieve growth of 1.5%-2.5% next year after three consecutive quarters of economic stagnation through June.

'Relatively optimistic'

"It's out of touch with reality," said Patricia Terrazas, a member of the opposition center-right National Action Party (PAN) who chairs the finance committee in the lower house of Congress. "And it's not in synch with the indicators."

Credit rating agencies also weighed in on what they described as rosy forecasts for growth and production from state oil company Pemex.

Moody's deemed both estimates "relatively optimistic" in a brief statement Monday, and suggested that Pemex may need even more support from the government.

Similarly, Fitch analyst Charles Seville told Reuters the government's growth and oil output estimates "may prove over-optimistic."

Other experts have steadily pared back their expectations for the economy, and did so again in August. The median forecast in the central bank's latest monthly poll of economists projected growth of 1.4% next year after 0.5% in 2019.

Meanwhile, Mexican auto exports suffered their biggest annual decline in nearly 3 1/2 years in August. Automotive output is on track for its worst year in a decade.

Lopez Obrador took office in December vowing to reduce chronic inequality and deliver average annual growth of 4%.

Pemex predictions

Forecasts for increased oil production from the highly indebted Pemex also met with skepticism.

FILE - A Pemex gas station is seen in Mexico City.
FILE - A Pemex gas station is seen in Mexico City.

The budget estimates Pemex's year-end 2020 oil output at 1.95 million barrels per day (bpd), up from an estimate of 1.73 million bpd this year, even though the state-oil firm's crude production has fallen for 14 years running.

Falling oil production and prices, as well declining income from taxes as Mexico's economy struggled to avoid recession, have meant lower tax revenue for the government.

Alberto Ramos, head of Latin American research at Goldman Sachs in New York, said Herrera's plan for raising revenue without new taxes may also include some wishful thinking.

"The government may be overly optimistic about its capacity to raise tax revenue, close loopholes, tackle evasion and non-compliance, and its capacity to further compress operational expenditure," he said in a client note.

What's next

Alfonso Ramirez Cuellar, who chairs the budget committee in the lower house of Congress that will evaluate the budget blueprint, expressed a mostly positive view on the proposal but also said more work needed to be done on generating taxes.

The budget must now pass the lower house of Congress and the Senate before a final approval deadline of Nov. 15.

But as Lopez Obrador's ruling coalition holds majorities in both chambers of Congress, "any changes are likely to be minor," said Nicholas Watson and Mario Marconini of consultancy Teneo.

Ramirez Cuellar said his budget committee would not be a rubber stamp.

"The lower house will fully use its powers of revision," he said.