TBY talks to José Antonio Meade Kuribreña, Secretary of Finance and Public Credit, on the stability of the Mexican economy and the responses made to combat the global financial crisis.
TBY How has the Secretariat contributed to the financial performance of the Mexican economy over the last five years?
JOSÉ ANTONIO MEADE KURIBREÑA The main contribution of the Secretariat to the Mexican economy has been a solid and prudent management of macroeconomic policy. As a result of the responsible management of fiscal policy in recent years, we were able to implement counter-cyclical policies in response to the global financial crisis, which attenuated the effect of the shock on the welfare of the population, without threatening the sustainability of public finances and the stability of the economy. This was the first time in the recent history of the country that a counter-cyclical fiscal policy was put in place in response to a crisis. In previous decades, the effects of a crisis on welfare were aggravated by the additional tightening of fiscal and monetary policy, in contrast to what was seen recently. The solid stance of our macroeconomic policy has also contributed to the vigorous recovery of the Mexican economy after the global crisis and to the fact that at present the fundamentals of the local economy are very strong, without any sign of the economic imbalances that are currently prevalent in several countries around the world.
How could new fiscal reform reducing the federal budget’s reliance on oil and gas activities improve the diversification of the Mexican economy?
One of the main objectives of the current administration has been precisely to strengthen public finances by reducing their dependence on oil revenues, and in that context two fiscal reforms directed precisely at this objective have been approved in the last four years. The first was approved in 2007 and the second in 2009. The first reform, approved in 2007, was oriented toward broadening the tax base and included measures like the introduction of a minimum income tax and a tax on cash deposits that affected only agents operating in the informal sector of the economy. The second reform, passed by congress in 2009, sought to increase tax revenues by increasing the rates of all major taxes, including income and consumption taxes, in a way that minimized their distorting effects. As a result of these two reforms, non-oil tax revenues have increased by close to two percentage points of GDP once we adjust for the position of the economic cycle. While we should continue with measures along these lines, we think that the medium term trend of non-oil revenues is very encouraging and that substantial progress has recently been achieved.
One of your main priorities is managing the public deficit. The reduced figure currently stands at 2.7% of GDP, and you were targeting 2.3% for end-2011. What role is deficit reduction playing in Mexico’s economic performance?
The framework for fiscal policy in Mexico is established in the fiscal responsibility law, according to which in normal conditions public finances have to be balanced, excluding investment by PEMEX. The law contains an escape clause for extraordinary economic or social circumstances. Given the magnitude of the global financial crisis, at the end of 2009 the federal government prepared a multi-annual fiscal policy strategy that contemplated temporary and moderate fiscal deficits to support economic activity while output was below its potential level. In this context, a deficit of 0.8%, excluding investment by PEMEX (or 2.8% including it), was observed in 2010, a reduction in the deficit for 2011 to 0.5% (or 2.5% including investment by PEMEX) was approved for 2011, and a further reduction to a deficit of 0.4% (or 2.4% including investment by PEMEX) was recently approved for 2012. For 2013 we are projecting a return to a balanced budget. As I mentioned before, this multi-annual fiscal policy strategy has been oriented at providing a stimulus to the economy during the recessionary phase of the economic cycle while preserving the sustainability of public finances.
According to Banco de México, the Mexican economy expected a 3.8% GDP growth in 2011 with the inflation rate falling from 5% to 3%. How is this performance affecting the federal budget, and what can we expect from 2012 in terms of Mexico’s economic growth as well as budget allocations?
At the Secretariat our own projection is that in 2011 the Mexican economy will grow at a pace of 4%, which is entirely consistent with recently released figures of economic activity and with what private sector analysts are expecting. On the inflation front, in recent months inflation has evolved very favorably, to reach levels that are entirely consistent with Banco de México’s long-term target of 3%. We regard this as a very welcome development, as it represents an additional factor that contributes to the fundamental strength of the Mexican economy. For 2012, in terms of growth we are projecting that GDP will increase by between 3.3% and 3.5%, a projection that is also consistent with private sector expectations. In line with the positive behavior of the economy, expenditure over recent years has registered positive real growth rates in spite of the fiscal consolidation implied by the decreasing path of the fiscal deficit. For 2012, overall expenditure will increase by 4.1% in real terms and programmable expenditure excluding investment by PEMEX will increase by 6.2%.
In addition to oil and gas, manufacturing, and retail services, what other strategic sectors will lead the performance of Mexico’s economy in the next five years?
I would like to begin by saying that for the sectors you mentioned, which are strategic and have had a very positive evolution recently, there are several reasons to expect that they will continue to show an important dynamism in the near term and that they will continue to be strategic for the entire economy. In the case of manufacturing, we have seen several signs of an important increase in the Mexican economy’s competitiveness in recent years, a result of which Mexican exports have gained market share in the main world markets. This explains the fact that Mexican exports have continued to grow at healthy rates even when the world economy is decelerating. In the case of the energy sector, we expect a marked improvement over the next few years associated with the reforms we have made to the regulatory framework of the sector. These reforms include changes to PEMEX’s corporate government structure, as well as the “incentive contracts,” which allow PEMEX to share the risks of exploration projects with private agents. In addition to these sectors, other sectors that we regard as strategic in terms of their potential to generate employment and trigger regional development are the construction sector, in which housing and infrastructure will play very relevant roles, the science and technology sector, which has seen a very important increase in budgetary resources, and the agricultural sector. In all these cases, we have worked to improve the regulatory framework and we have complemented these legal changes with budgetary resources.
According to different international credit rating agencies (Standard & Poor’s, Fitch, and Moody’s), Mexico’s sovereign debt is considered very stable. Do you expect an upgrade in Mexico’s sovereign rating in the medium term and what do you envision for investor demand for public debt?
The first thing to note with regards to Mexican public debt is that, in sharp contrast to what occurred in previous episodes of international stability, during recent months we have seen that the demand for Mexican debt has been very stable even in the face of acute increases in volatility in international markets. Undoubtedly, this is related to the strength of the fundamentals of the Mexican economy and to the hard-earned credibility of our macroeconomic policy. Looking forward, the fact that there are no signs of imbalances building up and that the macroeconomic stance will continue to be very solid—with inflation converging to its long-term target and with the public deficit at moderate levels and under a decreasing trajectory—lead us to expect the Mexican assets will retain their attractiveness for international investors. Finally, it is relevant to note that according to several indicators, including for example the average maturity of bonds, Mexican public debt compares very favorably with that of other economies that currently have better credit ratings, and while it is difficult to make any specific predictions about the decisions of rating agencies, there are several policies that have been followed such as a more dynamic accumulation of reserves that imply that the fundamentals of the Mexican economy have been
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