The change in forecasts from a primary surplus to a primary deficit may suggest that Ramirez de la O was effective in persuading the president to tone down austerity slightly. (Mexico has not registered a primary deficit since 2016, including in 2020’s pandemic crisis.) The 2021 forecast was also updated for a 0.4% of GDP deficit, below the 0.0% that was forecast in March, mainly on higher spending. The overall balance is forecast at -3.5% of GDP, a smaller deficit compared to the -4.2% forecast for 2021.
The macroeconomic assumptions look optimistic, with 2022 GDP foreseen at 4.1% and year-end inflation at 3.4%. The market currently expects 3.0% and 3.8%, respectively. The assumption that oil production will increase over 4% from the 2021 projection and over 7% from current levels to 1.826 million barrels per day also looks optimistic, in our opinion. Therefore, revenues are potentially overestimated, and thus the deficit is potentially underestimated.
The budget presented a reduction in the profit-sharing fee that state-owned company Petroleos Mexicanos (PEMEX) pays to the government, to 40% from 54% in 2021, which could affect the federal government revenue but also potentially reduces the need for assistance from the government to PEMEX.
The broadest measure of net public debt is forecast at 51.0% of GDP in 2021 and 2022, lower than the 53.7% approved in the 2021 budget and also lower than the 52.4% in 2020, though significantly higher than the 44.5% in 2019. The bill envisages public debt remaining stable at 51.0% until 2027, the end of the forecast horizon. This contrasts with a downward trajectory that was expected in the 2021 budget. That said, due to a lower than expected debt to GDP ratio in 2021 the new estimates imply a lower debt to GDP ratio's path than that expected a year ago.
The primary balance target is slightly lower than what we expected, but this is not necessarily bad because Mexico has fiscal space to help the economy overcome the ravages of the pandemic in the economy. The debt to GDP ratio budgeted for 2021 and 2022 remains, however, in line with our expectations, and so we continue to believe that rating downgrades are unlikely to happen in the next couple of years. That said, without comprehensive tax reform, we are skeptical that the government will be able to keep indebtedness from rising in the longer term. This is because, while spending will tend to increase on the back of higher spending in pensions, amid low potential output and possibly declining oil revenues, total public revenues cannot increase sustainably.