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Mexico's budget juggling act: a need to balance weak growth, fiscal discipline

By Anthony Esposito

By Anthony Esposito

MEXICO CITY, Sept 8 (Reuters) - The Mexican government's highly-anticipated 2020 budget will have to strike a careful balance, weighing the realities of slowing economic growth and dwindling resource generation with commitments to fiscal discipline.

Market watchers, credit ratings agencies and investors will pour over the budget proposal when Finance Ministry officials present it to the Lower House of Congress on Sunday evening for guidance on President Andres Manuel Lopez Obrador's spending priorities for Latin America's second largest economy.

Finance Minister Arturo Herrera said on Wednesday the budget package will be "extraordinarily responsible," while the central bank has underscored in its most recent statements the importance that it must "generate confidence."

Lopez Obrador has promised another austere spending plan with no new taxes or tax increases.

But the government has limited room to cut more fat from programs after it reduced funding for several ministries in order to centralize spending, fight public sector corruption and honor a campaign pledge to implement fiscal austerity in its first budget in December.

Mexico's hospitals, the immigration service and shelters for victims of domestic violence were among the services hit by the steep budget cuts.

"We have to recognize that we have a serious income problem, we have the decision and commitment of maintaining a surplus, of fulfilling the financial obligations of the Mexican state," said Alfonso Ramirez Cuellar, who chairs the budget committee in the Lower House.

Falling oil production and prices, as well declining resources from income and value-added taxes as Mexico's economy barely escaped entering a recession, have meant lower government resources, said Ramirez Cuellar, who is also a member of Lopez Obrador's leftist National Regeneration Movement.

He said the government's spending priorities next year will include the key energy sector, health, education and beefing up the National Guard, a new security force created by Lopez Obrador to bring down record homicide rates.

Security Minister Alfonso Durazo said he expected the budget to set aside 56 billion pesos ($2.87 billion) for the National Guard.

The National Guard has been tasked with helping to patrol Mexico's borders, a move meant to placate President Donald Trump's demands of stemming the flow of U.S.-bound migrants.

Mexico has reduced the flow of undocumented migrants crossing the country toward the U.S. border by 56% between May and August, Foreign Minister Marcelo Ebrard said on Friday.

Other spending priorities will likely include infrastructure projects such as a new refinery, the so-called Mayan Train project and transfers to state-owned oil company Pemex.

"All of the president's priority projects will be included in the budget and some will require more resources than this year," Eurasia Group analysts Carlos Petersen, Daniel Kerner and Ana Abad said in a research note.


ALL EYES ON THE FISCAL SURPLUS

One of the most salient measures of Lopez Obrador's commitment to fiscal responsibility will be the primary fiscal surplus targeted for next year.

In order to keep markets happy the primary fiscal surplus needs to be above 0.5% of GDP, since going below that "would signal a weakening commitment to fiscal discipline," according to Alberto Ramos, head of Latin American research at Goldman Sachs in New York.

A preliminary budget forecast sent to lawmakers in April forecast a primary surplus of 1.3% of GDP for 2020 and in recent comments Finance Minister Herrera left room for it to be adjusted.

"We have to keep looking for ways to stabilize the debt trajectory, we have to have some level of primary surplus and we have to look for sources so that income continues to grow," Herrera said.

Ramirez Cuellar, who has been meeting with Finance Ministry officials over the past week to works out the details of the budget, said the number would hover around 1%.

"It'll be around 1%, a little more or a little less. It's still being discussed," he said.

If the budget ultimately targets that level, "that wouldn't be a disaster, though, since two consecutive years of primary surpluses is good going, particularly for a left-wing government," said Edward Glossop, emerging market economist at Capital Economics. ($1 = 19.5293 Mexican pesos) (Reporting by Anthony Esposito; editing by Darren Schuettler)