(Expansión) – In compliance with article 42 of the Federal Budget and Treasury Responsibility Law, the SHCP published its General Economic Policy Guidelines (PGPE23) in April. The document presents the expectations of the federal government on the main economic and financial variables for the end of 2022 and for 2023.
Undoubtedly, it is essential to review this information from a subnational perspective, in order to understand the challenges faced by the states and municipalities of our country when defining their financial policy. Undoubtedly, the PGPE23 establish a roadmap for decision-making in budget matters and public policies in the short and medium term.
Among the most important information of the PGPE23, is the estimate of GDP growth for the end of 2022. This went from 4.1%, in the 2022 Economic Policy Criteria (CPE22), to 3.4%. The important thing here is that, despite this reduction, the federal government expects that by the end of 2022 its budget revenues will be greater than those approved in the CPE22 (6.5 billion pesos against 6.2 billion pesos).
This increase in budget revenues, in principle, would be the result of an expected increase in oil revenues through a better price (92.9 dollars against 55.1 dollars) of the barrel of the Mexican export mix (MME). In this sense, oil revenues would be approximately 1.6 billion pesos against 1.1 billion pesos previously. However, on the other hand, it is estimated that by the end of 2022 tax revenues will be lower (3.7 trillion pesos against 3.9 trillion pesos).
From my point of view, this situation is possible due to the performance of the following variables. On the one hand, we have lower GDP growth and a stimulus policy for the IEPS tax on fuels. Stimulus, which according to the SHCP reported last month, caused the IEPS collection in the first half of 2022 to represent a loss for the treasury of around 22,055.0 million pesos.
However, given that the price of a barrel of the MME is now higher, the government would be obtaining excess income that could be used to continue paying the subsidy and offset its negative effect.
Now, we must say that for the first six months of the year the observed Federal Participable Collection is 16.8% above that registered in the same period of 2021 (in nominal terms). For its part, the accumulated to the first semester of Branch 28 is 18.2% above what was registered last year and 9.7% against what was approved in the 2022 Federation Expenditure Budget (PEF22).
Furthermore, the SHCP published in the April document an estimated amount of Federal Participations of 1,033,108.6 million pesos, an amount 13,618.5 million pesos higher than what was approved in the PEF22. In my opinion, this is very good news for states and municipalities.
Despite this, we must say that, although an improvement in the federal government’s budget revenues is expected as a result of higher oil revenues, the PGPE23 also consider higher inflation and a higher level of interest rates. With this, it is natural to think that the financial cost of the debt contracted by subnational entities could increase.
With all this in mind, the diagnosis for subnational public finances would be as follows. On the side of the income received by the states and municipalities, we can say that, with the expected increase in the price of the MME, the budgetary income of the federal government would benefit, and with it the federal contributions. Although, on the other hand, the lower expectation of national economic growth could negatively affect the expected collection of own income.
On this last point, it should be said that, in recent years, many sub-nationals have made great efforts in auditing and stimulus policies to promote the payment of local taxes by citizens. This, without a doubt, could give states and municipalities greater flexibility in their budgeting process, considering the amount of freely available income they will receive.
Regarding the spending chapters, the expectation of inflation for the end of the year could translate into pressure in some areas such as Personal Services and Materials and Supplies. Here it should be noted that those subnationals that show lower primary deficits and lower levels of current liabilities in their public accounts will be able to more easily generate strategies that make planning and spending control more efficient.
Finally, increases in interest rates should technically translate into a higher cost of financial obligations, derived from higher interest payments. However, some clarifications should be made in this regard. Today, most of the subnational structured debt includes, within its contracts, the obligation to contract some type of financial derivative in order to reduce exposure to interest rates.
However, on the short-term debt side, we could certainly expect an increase in debt service. Depending on the proportion of this type of debt within the total debt, and its terms and conditions, this could translate into a significant outlay for the states or municipalities.
All of the above helps us understand the economic and financial context that Mexican subnationals face in the short term. Now, it only remains to wait for the 2023 Economic Package that the SHCP will present to the legislature on September 8 and its eventual approval no later than November 20.
Editor’s Note: Roberto Ballinez is Senior Executive Director of Public Finance and Infrastructure at HR Ratings. Follow him on . The opinions expressed in this column belong exclusively to the author.