Mexico is facing an uphill battle to redress its fiscal
performance, in the wake of a punishing recession caused by the
The government has tabled a tough budget bill, due to be
passed by Congress this month, but some analysts believe the
proposals will have to be watered down to get through.
Government officials have admitted that the fiscal
credibility of the second largest Latin American economy was at
I am confident we will have a responsible decision
taken by Congress, said Agustin Carstens, Mexicos
finance minister told Emerging Markets.
There are always adjustments [to the budget, as part
of the legislative process]. It would be important to address
the issue of permanent reduction in income... Congress in one
way or another will address this, he said.
The budget proposals focus on raising existing taxes and
imposing new ones, including a 2% sales tax and another excise
tax. Three ministries were abolished as part of efforts to curb
Some have warned that Mexico has been on a slippery slope
for some time, due to a combination of falling oil output and
revenues against a background of rising expenditures.
Alejandro Werner, the Mexican deputy minister of
finance, told a seminar in Istanbul: Once a [fiscal]
deficit becomes politically acceptable, we run the risk of
postponing the fiscal adjustment for too long and generating
problems for the future.
The Mexican governments actions have won praise
from the IMF. Nicolas Eyzaguirre, the IMFs western
hemisphere director, said: The stance on fiscal policy is
the appropriate one, in terms of not withdrawing the fiscal
stimuli. At the same time, it has been very realistic and
courageous in terms of trying to finance it through additional
taxes that are not particularly popular in the middle of a
David Robinson, the Funds deputy director for
the western hemisphere, said: The budget is trying to
draw a complex balance between the short term needs of the
economy and putting the public debt on a declining trend in
2010. Our judgment is that the policies that the administration
has put forward in this draft budget are a very good
Market analysts view of the budget bill has been more
cautious. Daniel Volberg, a New-York based Morgan Stanley
economist wrote in a recent report on Latin America: Even
if congress passes the tax reform in its current form, avoiding
meaningful medium-term fiscal deterioration would still require
a firm efforts to contain spending growth down the
Mexico was severely hit by the global financial meltdown.
Its currency came under extreme pressure and Mexico was the
first country to access the new so-called flexible credit line
of the IMF last year.
A preventive $46 billion package, the largest amount granted
under the IMFs Flexible Credit Line programme to date,
helped Mexico to defuse a potentially destabilizing crisis.
Eyzaguirre said: It meant that pressures on the
currency abated completely, it is not an issue anymore. The FCL
was a very important element to stabilize the foreign exchange
Carstens said: The FCL allowed us to maintain access
to capital markets and avoid financial contagion. We managed to
steer clear from any form of financial contagion.