MEXICO CITY: The Mexican government expects to lower spending next year by 135 billion pesos ($8.8 billion), in addition to the 124 billion pesos it has cut from this year’s budget as it aims to continue narrowing fiscal deficits amid lower world oil prices, the Finance Ministry said.
In a preliminary outline to Congress of next year’s budget, the ministry projected a fiscal deficit of 3% of gross domestic product, down from an expected 3.5% in 2015. The federal government’s share of the deficit is expected to narrow to 0.5% of GDP from 1% this year, while investment at state enterprises will account for the rest.
President Enrique Peña Nieto has until early September to submit next year’s budget proposal to Congress, and some of the variables could change by then.
The government lowered planned spending this year in response to the sharp drop in world oil prices and expectations of more difficult financing conditions ahead with an anticipated interest-rate increase by the U.S. Federal Reserve.
The shortfall in budget revenue from lower oil prices is covered this year by hedges, although the government won’t have the benefit of the hedges in 2016. The preliminary outline sees Mexico’s export crude oil averaging $55 a barrel next year. For this year, the price is expected to average $50 a barrel, although the government has hedged exports at $76.40 a barrel.
The Finance Ministry said the preliminary outlook comes amid “complex external conditions” that will have an impact on public finances, but it noted that Mexico’ exchange rate, interest rates, and sovereign risk have been less affected than those of other emerging markets.
Next year’s spending is likely to be 4.3% below that of 2015.
A tax overhaul passed in 2013 and implemented last year will help to offset some of the lost oil income, with non-oil tax revenue next year expected to be equivalent to 11.5% of GDP, up from 9.7% in 2013. The ministry reiterated that the government doesn’t plan to raise taxes next year.
The budget outline projects GDP growth between 3.3% and 4.3% in 2016, compared with its 2015 estimate of 3.2% to 4.2%. It sees crude oil production of 2.4 million barrels a day, up from 2.288 million this year, with crude exports edging up to 1.065 million barrels a day from 1.014 million in 2015.
It estimates that inflation will be 3% this year and next, in line with the central bank’s target and current levels, while the average exchange rate is estimated at 14.50 pesos to the dollar for 2016 compared with 14.80 pesos forecast for this year.
