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Mexico Rejects Keynesian Stimulus, Doubles Down on Austerity

Michael O'Boyle, Max de Haldevang and Cyntia Barrera Diaz

(Bloomberg) -- Mexico’s debt-phobic government is rejecting calls for a Keynesian fiscal stimulus to dig the economy out of the worst slump since the 1930s, and is instead doubling down on austerity.

While many emerging market peers are spending freely to sustain demand during the pandemic, Mexico’s proposed 2021 budget published this week contains no significant spending increases, but rather a plan to cut debt.

The Finance Ministry expects to eliminate the primary deficit, which excludes interest payments, this year, and to run a primary surplus thereafter, according to its budge plan handed to lawmakers in Mexico City late Tuesday.

The proposals confirm leftist President Andres Manuel Lopez Obrador’s hostility to debt, bailouts and tax-breaks for big companies. He has repeatedly said that Mexico will rebound from the crisis faster if it’s unencumbered by a heavy debt burden.

Mexico’s coronavirus aid package earlier was the smallest among major Latin American economies, the International Monetary Fund said in April.

The proposed financial plan sees total debt falling to 53.7% of GDP in 2021 from 54.7% this year. Overall government spending will drop 0.3% in real terms compared to the original 2020 plan, and will grow just 0.1% when compared to an estimate of the executed budget.

Read More: Policy Shift Needed to Fortify Mexico’s Long-Term Outlook

In its central scenario, the government projects the economy will rebound 4.6% in 2021 after shrinking 8% this year. That’s more optimistic than private economists, who expect the economy to shrink around 10% this year, the biggest drop since 1932, with growth of 3.4% in 2021.

Finance Minister Arturo Herrera insisted the projection was realistic. “In reality it’s not a very optimistic estimate,” he said at Lopez Obrador’s daily press conference on Wednesday. After such a sharp contraction, “it doesn’t even put us on the growth levels we were at in 2019.”

During his presentation to congress on Tuesday, Herrera said that despite Mexico’s budget constraints the government will spend enough to address the health crisis and provide aid through the president’s social programs.

Campaign Promises

Mexico’s recovery will trail that of other economies due to continued austerity, said Gabriel Casillas, chief economist at Banorte.

“We welcome a highly disciplined fiscal budget, which was one of AMLO’s main campaign promises. However, we are concerned about the vigor of recovery,” he said.

In its proposal, the Finance Ministry budgeted for Mexico’s crude oil to sell at $42.10 per barrel next year, a rosier projection than its preliminary estimate of $30 per barrel, while it sees output at state oil giant Petroleos Mexicanos’ at 1.857 million barrels per day.

Herrera signaled on Wednesday that Mexico would carry out its annual oil hedge as usual for next year.

Read More: Mexico Is Cutting Pemex’s Oil Output Forecast in Latest Setback

The “supplementary fee” on gasoline taxes proposed in the budget could cause a spike in inflation, which is already above the central bank’s 4% ceiling, said Andres Abadia, senior economist for Latin America at Pantheon Macroeconomics.

Mexico’s lower house has until Oct. 20 to approve the revenue law, which must then be passed by the senate by Oct. 31. The spending law, which only needs lower house approval, must be passed by Nov. 15.

(Updates with Finance Minister’s comments from 8th paragraph)

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