Macro Analysis /

Mexico: Budget Proposal 2022 – Realistic despite an optimistic GDP outlook

  • The government adjusted higher the GDP forecast for 2021 (6.3%) and 2022 (4.1%), in our view optimistic in the latter

  • Both revenues and spending were increased for 2022, with slightly higher deficits in both years but stable debt levels

  • We believe the government is still committed with healthy public finances and welcome measures to increase the tax base

Gabriel Casillas Olvera
Gabriel Casillas Olvera

Managing DirectorInvestor Relations Officer and Chief Economist

Francisco Jose Flores Serrano
Juan Carlos Alderete Macal
Alejandro Padilla Santana
9 September 2021
Published byBanorte
  • The Minister of Finance, Rogelio Ramírez de la O, delivered today the budget proposal for fiscal year 2022 to the Lower House 

  • The proposal includes three documents: (1) The General Economic Policy Criteria;(2) the Revenue Law; and (3) the Spending Budget 

  • In the first, the government adjusted higher the GDP forecast for 2021, with the mid-point at 6.3% y/y (previous: 6.0%). For 2022, they expect 4.1% (Banorte: 3.0%; consensus: 2.9%), which we see as optimistic 

  • There were also changes in the rest of the forecasts, highlighting a move lower in oil production, although with a higher oil price, as well as higher inflation for both this year and next 

  • For 2021, they now see a primary balance deficit of 0.4% of GDP (previous: 0.0%), with the PSBR at -4.2% of GDP (previous: -4.0%). In 2022, they expect these at -0.3% and -3.5%, respectively 

  • On revenues, upward adjustments were made due to more favorable assumptions. For 2022, they expect a 1.3% increase in real terms. We highlight the proposal of two new simplified regimes for income taxes paid by individuals and enterprises, as well as a 0% VAT rate for female hygiene products 

  • Spending would grow 1.5% in real terms next year, with mixed changes in autonomous branches, albeit lower overall. In administrative ones, the ministries with more sizable gains would be Tourism and Welfare, with losses in Economy and SEDATU 

  • Resources to federal entities are estimated 4.7% higher relative to the approved amount in 2021, with higher transfers to states from taxes collected by the Federal Government (+6.7%) 

  • With this, the Historical Balance of the PSBR would reach 51.0% of GDP by year-end (previous: 50.8%). In 2022 and during the whole forecast horizon (2027), it is estimated constant and at the same level (51.0%) 

  • We believe the government is still signaling a firm commitment with healthy public finances despite an optimistic outlook for GDP next year. Moreover, we welcome measures aimed towards increasing the tax base, reiterating our view that Mexico will maintain its investment grade status by the three main rating agencies

The MoF submitted to Congress its budget proposal for fiscal year 2022. The Minister of Finance, Rogelio Ramírez de la O, delivered today the documents to the Lower House, which include: (1) The General Economic Policy Criteria (GEPC) –which states macroeconomic projections used to estimate the budget–; (2) the Revenue Law; and (3) the Spending Budget. In the first two cases, they must be approved by both the Lower House (October 20th) and the Senate (October 31st), while the spending budget should be approved only by the Lower House no later than November 15th.

Updated assumptions a bit rosier than consensus. Regarding GDP, mid-point forecasts stand at 6.3% and 4.1% for this year and next, respectively. Both are above the latest estimates of 6.0% and 3.6% (see table below), in the same order. The former is relatively in line with our forecast at 6.2%, which also coincides with consensus in the latest Banxico survey. Nevertheless, 2022 looks optimistic relative to our 3.0% and the market’s 2.9%. The average USD/MXN was unchanged, standing at 20.1 per dollar this year and 20.3 in 2022. We recall that a weaker peso has a slight positive effect on the fiscal deficit, as gains in higher oil income in local currency more than compensate for an increase in foreign debt’s financial cost. Inflation stands at 5.7% and 3.4% for the same periods, in line with the latest central bank forecasts. Regarding oil, the average price for this year is higher than in the quarterly report, to 60.6 US$/bbl. For 2022 it stands at 55.1 US$/bbl (previous: 53.1 US$/bbl). In contrast, oil production for 2021 would be lower, at 1,753kbpd from 1,794kbpd. For 2022 the adjustment was also to the downside, at 1,826 from 1,867kbpd in the preliminary version of the GEPC, released in March. Just as a reference, YTD production until July has averaged 1,677kbpd according to the National Hydrocarbons Commission (CNH, in Spanish).

Wider deficits in coming years. Public Sector Borrowing Requirements (PSBR) –the broadest measure of the fiscal deficit– were revised lower, resulting in higher deficits. For 2020, these are estimated at -4.2% of GDP from -4.0% previously. In a similar fashion, PSBR for 2022 are projected at -3.5% (previous: -2.9%). According to the MoF, this was driven by: (1) The need to maintain support in the health sector and the economy; (2) higher inflation-indexed debt levels; (3) the utilization of resources, trusts, and other assets to fund spending requirements, as these metrics are accounted for as net financing. Consequently, the public balance[1] was also adjusted downwards, to -3.2% of GDP for 2021 and -3.1% in 2022.

[1] The Public Balance is obtained as the PSBR less the financial requirements of the Mexican Bank Savings Protection Institute, financial requirements of deferred investment projects, adjustments to budget records, financial requirements of the National Infrastructure Funds, program of debtors and the expected gain or loss of development banks and development funds.

Lastly, the primary balance –the public balance less debt financial costs–, which internationally is considered as a fundamental measure of the health of public finances, was adjusted to -0.4% and -0.3% of GDP, in the same order, as shown in the chart below to the left.

More revenues this year... For 2021, total revenues are estimated at $5.9 trillion (US$294.5 billion), $333.6 billion more than the amount originally approved in the 2021 Revenue Law. This is mainly explained by higher oil-related income –with higher prices more than compensating for lower production– by $139.4 billion, along non-tax, non-oil revenue by +$150 billion. Tax revenues would also be higher at the margin, up $42.1 billion. Specifically, this would translate into an overall increase of 0.3% of GDP, consistent with the adjustment to the PSBR.

…as well as in 2022. For next year, revenues are estimated at $6.2 trillion (US$309.4 billion), a 1.3% y/y increase in real terms relative to this year’s estimate (see table below). In the detail, and considering the new estimates above, a 2.65 y/y decline is expected in oil-related income because of a steeper downward revision in the price of crude oil relative to 2021 when compared to higher production. In this backdrop, the document mentions that the Federal Government will follow the strategy of fully hedging the exposure of a potential decline in oil prices. Non-tax income would decline 34.7%, remembering that excess resources obtained mainly from the extinction of trusts and other funds were accounted in this category in 2021. Income from government-controlled entities (IMSS, ISSSTE and CFE) would fall only 0.1%. Tax income are estimated to grow 6.4%, driven by a further improvement in economic activity and expected gains from more efficient collections. Inside, this would increase all relevant categories, including income (+4.9%), value-added (+4.5%), imports (4.1%) and excise taxes (+19.2%).

No additional taxes, but new simplified regimes to foster a wider tax base and lower informality. One of the main highlights from the revenue side is the proposal of a “Simplified Regime of Confidence” of income-tax payments for: (1) Self-employed individuals (“personas físicas con actividad empresarial” in Spanish); and (2) micro, small and medium enterprises (MSMEs). These aim to foster a wider tax base, induce lower informality, and incentivize growth and employment. The goal is to simplify processes to comply with tax obligations, reducing their administrative costs, as well as to provide other incentives. Both regimes establish fixed payments based on yearly gross income, with eligibility in the former only for individuals with a maximum income of $3.5 million (progressive basis) and up to $35 million in the latter. Specifically:

(a) For self-employed individuals: This group also includes individuals providing professional services, leaseholders, and people working in the primary sector. Progressive tax rates would be applied based on annual gross income, as shown in the table below.

Total obligations would be calculated by multiplying the corresponding rate to annual income received. The MoF estimates around 21 million potential beneficiaries of this new regime –including some individuals currently in compliance, as well as those that could migrate from the informal sector–. For example, according to an analysis by the ministry, 10.2 million out of a total 12.5 million of self-employed individuals in compliance have an annual income below the $3.5 million threshold, equivalent to 81.6%. Currently, they need to undertake several administrative procedures such as the presentation of informative tax statements, declaring retentions, transactions with suppliers, as well as make provisional and annual income tax return statements. This forces them to keep and maintain updated book records and hire external accountants, increasing administrative costs. The new regime would be based on only five requirements, leveraging the widespread use of electronic invoices and signatures. The latter allows for the automatization of procedures, so the required information will be pre-loaded for taxpayers at the IRS.

(b) For MSMEs. According to an analysis by the MoF, 96% of total businesses established in Mexico currently could be benefitted, while INEGI has counted 2.1 million companies as micro- and small-sized. Under this regime, companies will not be required to provide provisional statements based on the “profit coefficient” (“coeficiente de utilidad” in Spanish) of their previous fiscal year, which could hurt business with high income seasonality. More importantly, tax obligations would be calculated on a cash-flow as opposed to an accrual basis, which could help bolster liquidity levels. In addition, they will be allowed to use an accelerated depreciation scheme for their investments, with more favorable rates than currently applied. The regime also tries to maximize the simplification of procedures with pre-loaded information and allow for electronic payments, recognizing the nature of these businesses. Nevertheless, the ministry argues that it does not imply a lower tax bill, as the income-tax rate remains at 30%.

Other revenue measures. In 2022: (1) The VAT rate for female hygiene products will fall from 16% to 0% with the goal of promoting gender equality; (2) the provisional retention rate for interest-paying securities will fall from 0.96% to 0.08%, in accordance with the methodology established in the Revenue Law which considers the rate of return of Mexican financial instruments and observed inflation; and (3) excise taxes for auto fuels, sugary drinks and cigarettes will be updated. Moreover, the MoF will work to make the necessary adjustments for the effective taxation of companies benefitted by the economic digitalization, particularly the agreements achieved for the imposition of a global minimum tax rate for multinational companies.

Upward adjustments to spending in 2021. Total expenditures this year are projected at $6.7 trillion (US$335.7 billion), representing $439.5 billion more. The programmable component would rise by $448.1 billion, with the non-programmable down by $8.6 billion. The former is partially driven by higher income, although it also considers additional fiscal stimulus of $102.9 billion. Within the latter, the decline is mainly on lower-than-expected financial costs, even after accounting for higher transfers to states resulting from taxes collected at a federal level.

Modestly higher spending next year, still socially focused. For 2022, the MoF proposes spending of $7.0 trillion (US$353.3 billion), 1.5% higher in real terms relative to this year’s estimates (see table above). The document highlights that spending is based on the three guiding principles of the National Development Plan, which are (1) Politics and government; (2) social policy; and (3) economics. Spending aims to strengthen the Rule of Law and to reinforce the government’s social priorities. In this context, flagship projects and programs are projected at $543.4 billion (US$27.2 billion), as shown in the table below.

Important adjustments to programmable spending. This component would fall only 0.1% y/y in real terms relative to year-end 2021. Nevertheless, when compared to the Spending Budget approved for the current year, it is 9.6% higher. Based on the latter, spending by autonomous branches would fall 0.5%. We highlight the strong decline by the National Electoral Institute (INE) of 11.5%, as mid-term elections took place this year. On the contrary, the National Statistics Agency (INEGI) would grow 38.4%. Administrative branches are estimated to expand 16.5%. The most benefitted ministries include Tourism (64.0%), Welfare (+48.1%), and Public Security (41.9%). We note that the Ministry of Health would grow 27.6%. On the contrary, the highest reductions were in the Ministry of Economy (-31.4%), SEDATU (-25.3%) and Defense (-10.8%). Spending in Pemex is poised to increase 12.7%, while CFE would climb 4.0%. Spending in both IMSS and ISSSTE are proposed to increase, in line with the priority in the health sector, up 8.1% and 2.5%, respectively. Lastly, expenditures in general branches would increase 6.1%, with transfers and subsidies up +5.5%.

With a sizable pickup in the non-programmable component. The government calculates 6.4% growth when compared to estimated data for full-year 2021. These would pick up 5.8% relative to the approved budget. Under the latter comparison, financial costs are expected higher by 5.4%, driven by the estimation of higher interest rates, albeit also on higher inflation. Transfers to states resulting from taxes collected at a federal level are estimated to increase 6.7%, as detailed in the following section.

Higher resources to federal entities. Total resources for states in 2022 would amount to $2.1 trillion (US$105 billion), up 4.7% from last year’s approved amount. This is driven by higher tax collection expected for the year, improving the availability of some of these resources. Apart from this, the government boosted contributions marginally higher by 2.7% (see table below).

Virtually all states will receive more federal government transfers. Specifically, with the 6.7% increase nationwide, only one federal entity will not have higher resources from this component (Baja California Sur, -3.2%). The states with higher growth include Querétaro (15.8%), Nuevo León (15.4%), and Michoacán (11.8%). as shown in the table below.

Slightly higher deficits imply a more modest reduction in debt levels in the medium-term. The Historical Balance of Public Sector Borrowing Requirements (HBPSBR) is now expected at 51.0% of GDP from 50.8% in the latest quarterly report. This is explained by the increase in PSBR mentioned above, with the upgrade in GDP not enough to compensate for it. The forecast for 2022, as well as for the rest of the horizon (until 2027) also stands at the same level (see below). Lastly, public debt is estimated at 49.7% of GDP in both years, with marginal declines in the rest of the period.

Fiscal prudence maintained, despite some optimistic estimates. We believe that the budget proposal reinforces the Federal Government’s commitment to healthy public finances, as has been the case in the last three years. Although some estimates look optimistic relative to market expectations –especially in GDP–, they still look realistic considering that: (1) The economy has not recovered fully from the contraction in 2020; (2) tailwinds from abroad will remain in place, with US stimulus measures key for this; and (3) the new ‘wave’ of COVID-19 is likely to have a more modest impact than in previous instances, mainly on prospects that the vaccination campaign will progress further. The latter, along with Minister of Financer Rogelio Ramírez de la O looking to refill stabilization funds, is consistent with the view of primary deficits this year and next. We also welcome the proposals aimed towards the simplification of administrative procedures for collecting taxes from individuals and small businesses, while also looking to increase the tax base and incentivize the transition towards the formal sector. Nevertheless, its impact is yet to be seen. In either case, and consistent with previous years, we believe that authorities will react to any negative deviations with spending cuts, prioritizing the fiscal stance. In this backdrop, we reiterate our view that Mexico will keep its IG status by the three main rating agencies (S&P Global Ratings, Fitch Ratings and Moody’s Investors Service), with macroeconomic stability paramount for this. Nevertheless, we still think that additional efforts to imbue market participants with higher certainty could support a more dynamic recovery, especially considering that lingering doubts remain in terms of some legislative proposals.