Mexico budget sees 2013 slowdown

Reuters/Mexico City

Presenting plans for a balanced budget for next year, Finance Minister Luis Videgaray said Latin America’s second biggest economy would expand by about 3.5% next year after growth of almost 4% in 2012.

Videgaray said a slowdown in the US, Mexico’s main trading partner, would hold back the economy.

“It’s a prudent estimate and also reflects the risks implied by the situation in Europe and of course the fiscal situation in the US,” Videgaray said.

Worries over the outlook have been fanned by the failure of US political leaders to reach a deal yet to avoid the combination of tax hikes and federal spending cuts set to start taking effect in 2013.

Still, new President Enrique Pena Nieto is hoping to capitalise on a recent improvement in the Mexican economy, which has outperformed its regional peer Brazil for the past two years, helping to spur record amounts of investment in 2012.

Videgaray outlined forecasts for oil production and the price of crude very much in line with the previous budget.

Mexico sees the average cost for a barrel of crude at $84.90 and oil output at nearly 2.6mn barrels a day. US crude was just below $86 a barrel on Friday. Oil revenues account for nearly one-third of the federal budget. The peso exchange rate was seen at 12.90 per dollar.

US demand for Mexican goods has helped shield the country from a wider global slowdown. But Pena Nieto’s administration, has work to do if wants to realise its ambition of raising economic growth to about 6% a year.

Pena Nieto took office last Saturday.

Visiting dignitaries were hopeful the new government would unlock more of the economy’s potential.

“I do sense considerable self-confidence in the country and a feeling that they are at a turning point,” former British finance minister Norman Lamont told Reuters earlier this week after attending Pena Nieto’s inauguration in Mexico City.

In his first speech as president, Pena Nieto pledged a balanced budget. That is required by law – excluding debt at state oil firm Pemex. Factoring in Pemex investment, a deficit of 2% of gross domestic product is forecast for 2013.

Pena Nieto has stressed the need for discipline in public spending, but also wants to raise infrastructure outlays and social security coverage, including pensions for the elderly.

To help pay for that, he wants to enact a fiscal reform to raise revenue and curb dependence on income from oil. He also plans to open up Pemex to more private investment.

Manlio Beltrones, the PRI’s leader in the lower house of Congress, said on Friday that the latest spending package was essentially a stop-gap budget due to time constraints.

The fiscal reform bill would be ready by July at the latest and would aim to raise Mexico’s tax take by an amount equal to two to three percentage points of gross domestic product to help pay for Pena Nieto’s social security plans, Beltrones said.

A trim public deficit and solid growth have helped attract record flows of foreign investment in Mexican stocks and bonds.

Investors have taken note of Pena Nieto’s stated intention to shake up competition and liberalise the economy, a message that contrasted with recent “interventionist” signals coming out of Brazil, Lamont said.

Lawmakers must approve the budget before the end of the year.