September 13, 2015

Heading into the second half of President Enrique Peña Nieto’s term, the Ministry of Finance (Secretaría de Hacienda) submitted the 2016 draft budget to Congress on 8 September and it will be discussed by lawmakers in the coming months. The government will likely face little opposition to passing the income law and budget bill in Congress, given the majority that the Institutional Revolutionary Party (PRI) possesses, at least in the lower house. The draft budget aims to trim the headline fiscal deficit from an expected 3.5% of GDP this year to 3.0% of GDP in 2016. Public sector borrowing requirements, which is the broadest definition of the fiscal deficit, are expected to drop to 3.5% of GDP in 2016 from 4.1% of GDP in 2015. In order to reduce the fiscal shortfall, the government remained focused on further cutting spending rather than increasing debt or taxes. While the decision to cut spending further was broadly expected, the market was awaiting the government’s oil price forecast for next year.



The administration of Enrique Peña Nieto began its second term in September within a context of significantly-lower global oil prices, more difficult financing conditions and a gradually-deteriorating economic outlook for the country. Among the key assumptions, the Ministry of Finance expects the economy to expand between 2.6% and 3.6% in 2016, which has been revised down from a previous 3.3% to 4.3% estimate. In addition, the government continues to see inflation ending 2016 at 3.0%. Equally important is the government’s new oil price forecast for next year. The government has recognized the permanent nature of low global commodities prices and expects that oil prices will stay low in 2016 as well. The draft assumes that the price for the Mexican mix of oils will average USD 50 per barrel, which is in line with the revised USD 50 per barrel expected for this year (previous estimate: USD 79 per barrel). Moreover, the country’s oil production platform will remain virtually stalled in both 2016 and 2017. The document projects that the country will pump a total of 2.247 million barrels per day (mbpd) in 2016, which would represent a 0.7% contraction over the 2.262 mbpd that are expected to be produced by the end of this year. For 2017, the government only sees a 0.1% increase in oil production.



According to the government, the gap created by lower oil-related revenues will be partially compensated for by higher non-oil revenues as a result of the fiscal reform bearing fruit and lower expenditures. In general, revenues are expected to drop to 21.5% of GDP in 2016 from 22.2% of GDP this year. While revenues will decline as a share of GDP, the silver lining is that the government will reduce its dependence on oil revenues and relay more on tax revenues from other sources. In past years, oil revenues had accounted for over one third of total public revenues. This year, oil revenues are expected to fall to 29% of total revenues and to decline further to 20% in 2016. Conversely, non-oil revenues are expected to account for 53% this year and nearly 60% in 2016. On the other side of the balance sheet, public outlays are expected to fall as a share of GDP from 25.7% this year to 24.5% in 2016, with programmable expenditures bearing the burden of the cut.

The group of analysts surveyed by FocusEconomics in this month’s LatinFocus Consensus Forecast report expect that the government will reduce the deficit from this year’s projected 3.6% of GDP to 3.2% of GDP in 2016.