| MEXICO CITY, Sept 12
MEXICO CITY, Sept 12 Weak growth, low oil prices
and difficulties in making promised spending cuts all threaten
Mexico's push for a budget surplus next year as credit rating
agencies consider downgrading its debt.
After running primary budget deficits since 2009, Mexico
last Thursday pledged to turn a projected primary deficit of 0.4
percent of gross domestic product into a surplus of 0.4 percent
of GDP next year.
Standard & Poor's and Moody's put Mexico's credit outlook on
negative this year, flagging concerns that weak growth could
keep pushing up debt after a collapse in oil prices hit Mexico's
income from crude sales.
Jaime Reusche, Moody's senior analyst on Mexico, said
higher-than-expected income from tax reform passed in 2013 had
helped offset the decline in oil income. But if tax revenue
doesn't hold up, the government may not meet its targets.
"The budget continues to signal consolidation and that may
indeed be favorable for maintaining the rating where it is, but
the proof is in the pudding," he said on Friday.
Mexico's austere 2017 budget lays out deep cuts that fall
heaviest on the education, communications and transportation and
agriculture ministries. The government proposed cuts worth
nearly 240 billion pesos, or about 1.2 percent of GDP, compared
to the 2016 budget.
Moody's and S&P are concerned that debt as a proportion of
GDP could keep rising in the coming years.
But Luis Madrazo, the finance ministry's chief economist,
said the government has already made deep budget cuts in 2016 to
stabilize the trajectory of debt to GDP. "We need to make sure
the cuts are permanent," he said on Sunday.
Meeting the goal may be tough. Last year, when sinking oil
prices sent the peso into free fall, Mexico announced spending
cuts of 124.3 billion pesos, nearly 3 percent of the budget.
While the government made some cuts, total spending still
overshot its original budget by more than 4 percent, or 197
billion pesos last year.
The finance ministry said in a statement to Reuters that
discretionary spending without financial investments, such as
absorbing part of state oil company's Pemex's pension
liabilities, was only 1.5 percent above budget.
Reaching a surplus "is not going to be easy, the pressure is
enormous," said Ernesto Cordero, a senator in the opposition
center-right National Action Party (PAN) and a former finance
Mexico's central bank last month warned that the country
faced a "unpostponable" deadline to cut back its debt in order
to maintain the confidence of foreign investors.
Spending last year rose nearly 5.9 percent in real terms,
the biggest increase since 2008, according to a Reuters analysis
of finance ministry reports to Congress.
The finance ministry said the increase was only 2.6 percent,
when excluding financial investments and pension costs.
Mexico was still able to cut its total public sector
borrowing requirements last year with the help of a one-off
boost to its balance sheet from a surplus transfer from the
"Even if Mexico does hit the target, the quality
of the adjustment is always important, not to have too many
one-off items in there," said Pramol Dhawan, an emerging markets
fund manager at Pimco.
Helped by better-than-expected tax revenue, Mexico was able
to map out big spending cuts at Pemex this year, easing concerns
the state oil company could require a major bailout.
But spending by the federal government has been harder to
rein in. One measure of discretionary spending, known as current
structural outlays, rose 3.7 percent last year in real terms,
shooting past the 2 percent ceiling set by the Finance Ministry
in its own austerity rule approved in late 2013.
The law allows the government to exceed the limit since its
recent tax reform lifted government income, according to the
Analysts said it would also be hard for the government to
contain expenditures ahead of state elections next year after
President Enrique Pena Nieto's Institutional Revolutionary Party
(PRI) lost seven gubernatorial races in 2016.
(Additional reporting by Dave Graham; Editing by Simon Gardner
and Jeffrey Benkoe)