20181217-法国巴黎银行-Mexico_s_2019_budget__The_devil_is_in_the_detail_9页_760kb

Summary of Mexico's 2019 Budget Analysis

Core Content

This report provides an analysis of Mexico's 2019 budget, focusing on fiscal policy, economic implications, and market reactions. It outlines the key messages, trade ideas, and potential risks associated with the budget, while also highlighting the underlying assumptions and structural changes that may affect the country's long-term fiscal health.

Main Viewpoints

Positive Signals and Market Response

• The 2019 budget is seen as an attempt by the new administration to send a positive signal to markets, emphasizing austerity and spending reorientation.
• Despite political uncertainty, the market is already pricing in a bearish scenario, with Mexican assets trading two notches below the current rating and equities at decade lows.
• The budget received a relatively positive market response, which may provide some flexibility for the central bank (Banxico) to maintain interest rates stable.

Fiscal Implications

• Short-term fiscal deterioration is less likely: The budget includes lower state spending and shows a more conservative fiscal approach, reducing immediate concerns about fiscal imbalances.
• Medium and long-term risks remain: The budget includes new social spending and structural changes that could increase fiscal pressures over time, such as higher pensions, expanded scholarships, and a shift towards social spending and a revamped energy sector.

Structural Changes and Challenges

• The administration is moving away from capital investment as the main fiscal consolidation tool and is favoring social spending.
• The energy sector reform, part of AMLO's "Fourth Transformation," is expected to increase Pemex's investment needs, potentially leading to financial strain.
• The cancellation of the New Airport of Mexico City (NAIM) and the expansion of existing airports could add to the fiscal burden.

Revenue and Expenditure Assumptions

• Revenue assumptions, particularly related to oil production and tax collection, are considered overly optimistic.
• The budget projects an extra revenue of 0.5% of GDP from these factors, which may not materialize due to unrealistic production forecasts.
• The overall fiscal spending for 2019 is still expected to be 1.4% of GDP, with many cuts being unclear and potentially leading to surprises during implementation.

Key Information

Budget Implementation Concerns

• The government's ability to meet budget targets is questionable, as previous administrations have struggled with this.
• The implementation of the budget is likely to be affected by strong seasonality and the lack of a clear spending pattern.

Monetary Policy Outlook

• The central bank is expected to keep interest rates on hold, given the positive market response and the need for more clarity on minimum wage adjustments and new social transfers.
• The budget may ease FX pass-through pressures, providing some room for monetary policy flexibility.

Sovereign Rating Risks

• The sovereign ratings model suggests that while a downgrade is not imminent, risks remain due to the shift towards populist policies, fiscal and institutional framework deterioration, and potential challenges in the energy sector.
• Rating agencies are likely to focus on:
  • Fiscal deterioration: Potential widening of the public sector deficit.
  • Rolling back reforms: Reversal of fiscal and pension reforms could weaken debt sustainability and growth prospects.
  • Weakened institutions: Policies such as price controls and reduced autonomy for regulatory agencies may raise concerns.
  • State-owned enterprise management: Increased political influence over Pemex and CFE could affect their operational efficiency.
  • Age-related pressures: Doubling pensions and expanding healthcare coverage may increase fiscal strain due to demographic shifts.

Macroeconomic Assumptions

• The 2019 budget's macroeconomic assumptions and elasticities are relatively in line with initial estimates and consensus.
• The elasticity of oil revenues to production changes was increased to 8%, which, combined with an overestimated oil production forecast, may lead to revenue overestimation.

Trade Ideas

• The report highlights a short EURMXN trade idea, with a positive carry of 9.66% per annum.
• While 5-year CDS and the long end of the local curve offer premium, the report prefers a more tactical and less risky approach.

Figures and Data Highlights

• Figure 1: Shows the 2019 budget bill's new measures, with a total of 1.4% of GDP in new spending projects.
• Figure 2: Compares the initial and final estimations of new spending programmes, highlighting the cost implications of Pemex's plans.
• Figure 3: Illustrates the historical gap between targeted and actual budgetary expenditure and gross debt.
• Figure 4: Displays the BNP Paribas sovereign rating simulator for Mexico, indicating potential rating shifts based on policy and fiscal changes.
• Figure 5: Provides a table of main macroeconomic variables, including GDP, inflation, exchange rate, and oil price expectations.
• Figure 6: Shows the variation in macroeconomic variables by percentage of GDP, with key elasticities and sensitivities.

Disclaimer

• This document is not investment research and is a marketing communication under MiFID II.
• It may contain "Research" as defined under MiFID II unbundling rules and is intended for specific professional clients.
• The information is based on public sources and is not guaranteed to be accurate or complete.
• BNPP may have conflicts of interest and may engage in transactions inconsistent with the views expressed in this document.

Conclusion

The 2019 budget represents a mix of positive signals and cautionary elements. While it reduces short-term fiscal concerns, the long-term fiscal risks remain significant due to increased social spending, structural changes, and the challenges in the energy sector. The market is currently skeptical, and the implementation of the budget will be key in determining its ultimate impact.