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Mexico's spending growth could threaten fiscal stability -UBS

MEXICO CITY, Oct 5 (Reuters) - Mexico's short-term fiscal stability could come under pressure if government spending commitments rise and growth falls, Swiss lender UBS said.

The Mexican finance ministry last month presented its 2023 budget proposal, signaling gross domestic product (GDP) growth of 3% in 2023 and anticipated tax revenue of 4.6 trillion pesos ($231 billion).

"While some macroeconomic assumptions seem optimistic, the budget is overall consistent with our view that the government will maintain stable public finances over the next few years," said UBS in the report issued last week.

Non-oil revenue excluding the gasoline excise tax is forecast to rise by a "modest" 1.3% relative to the 2022 estimate, said UBS, underscoring that the expected expansion in public revenue contrasts with a significant 11.6% real increase in expenditures.

Higher spending is expected "due in part to infrastructure investment-related expenditures for emblematic projects like the Mayan Train and the Dos Bocas refinery," Gabriela Soni, UBS's head of investment strategy in Mexico, said in the report.

Leftist President Andres Manuel Lopez Obrador took a more austere approach to spending in 2020, while regional neighbors took on heavy debt in response to the pandemic and its economic fallout. But the president's signature development projects, like the tourism-focused train and the refinery, have gone significantly over budget.

"All in all, rising spending commitments and secular low growth rates pose risks to the debt trajectory," the report said, adding that debt affordability could become a "problem" if the country did not grow.

The report added that Mexico will need to pay close attention to the U.S. economic trajectory and the war in Ukraine in order to protect its currency and bonds.

On the domestic side, the country still needs to pass a pending tax reform in order to strengthen public revenue and allow the government to maintain its spending pace, UBS said. (Reporting by Carolina Pulice in Mexico City Editing by Matthew Lewis)