In the first semester of 2022, the expense that the public sector paid for interest on Mexico’s debt was greater than the items of education, health and physical investment, and may increase more in the following months due to the greater increase in the interest rate. reference interest of the Bank of Mexico (Banxico).
“It is now worth paying attention to how the financial cost of the debt is increasing, how much it represents compared to other expenses. This spending is mandatory for the government; You cannot stop paying it, you can stop paying: education, health, other types of expenses that are important for social welfare,” explained Ricardo Cantú, deputy director of Operations and Institutional Strengthening of the Center for Economic and Budgetary Research (CIEP).
For now, ISR and VAT collection is increasing, but the problem is that in these first six months, education spending fell 10%, and health spending 2%. “We are already beginning to see how the blanket is getting smaller towards the end of the year and the 2023 economic package,” Cantú told Expansión.
In contrast, the financial cost of debt grew 1.9% in the first half of 2022, compared to the same period last year, totaling 387,255 million pesos. This expense was greater than the public money that was destined for the development of infrastructure (physical investment), with 381,675 million; to programmable spending for education, with 355,396 million, and health, with 304,050 million, refer data from the Ministry of Finance and Public Credit (SHCP).
Compared to the first semesters of previous years, this situation was seen in 2019 and 2020. Last year the highest expense among these four concepts was education.
In annual terms, from 2012 to 2021 this situation had not occurred, spending on education has been the highest since 2017. And from 2012 to 2016 it was physical investment, that is, the money that goes to the development of public works . Since 2012 there have been significant increases in the amount of the cost of public debt, and according to the CIEP specialist, this trend intensified after the rises in Banxico’s reference interest rate.
The coordinator of the Public Expenditure and Accountability program of Mexico Evalúa, Mariana Campos, said that for the end of the year greater pressure is expected due to mandatory expenses, such as the cost of debt and pensions, because it is not known how far will give the strategy to collect more taxes, and that has been rooted in greater control and vigilance towards taxpayers.
Ricardo Cantú explained that the greatest pressure to pay the cost of the debt will come from the effects of inflation and the rise in Banxico’s reference rate on government instruments such as Bondes D and Cetes, that is, short-term debt, since On average, 70% of the cost of debt in pesos is at a fixed rate. While the effects on the cost of debt in foreign currency will depend more on the behavior of the exchange rate, which is sensitive to geopolitical situations, such as the one experienced between the United States and China, by Taiwan, in recent days.
The Treasury expects the financial cost of the debt to increase at the end of 2022, since it changed its estimate from 3.5% of GDP in the economic package approved for 2022 to 3.7%, this with an interest rate estimate of 7.8% by the end of year. For 2023, it is estimated that it will be 3.3%, according to the 2023 Economic Precriteria.
Banxico’s interest rate is at 7.75%. Its next decision is scheduled for Thursday, August 11, and the market anticipates a further increase of 75 basis points, which would take it to a record figure of 8.50%. Experts anticipate that by the end of 2022 it will reach a point of 9.5%.
In 2021, the Financial Requirements of the Public Sector, the broadest measure of the deficit, stood at 3.8% of GDP, higher than the approved goal by 0.4 percentage points, as a result of the adjustment in debt instruments indexed to inflation during the year, as well as the use of financial assets to finance the public deficit.