MexECON Blog

Public Sector Finances Remain Healthy

In a report released earlier this summer, the government said Mexico's public-sector budget deficit came in at 101.7 billion pesos in the first half of 2010, up from a deficit of 94.6 billion pesos in the first half of 2009.  Compared with the size of the economy, however, the deficit was still relatively low.  The annualized first-half deficit was only 1.6% of Mexico's expected gross domestic product (GDP) in 2010.  That compares very well with the deficits projected for the United States and many other developed countries this year.  For example, the Organization for Economic Cooperation and Development (OECD) currently projects the U.S. public-sector deficit will come in at 10.7% of GDP in 2010.

The report also showed that Mexico's public-sector net debt at the end of the first half stood at 3.913 trillion pesos, equal to 30.2% of GDP.  That was up only modestly from the end of 2009, when Mexico's net debt stood at 3.792 trillion pesos, or 30.1% of GDP.  For comparison, the OECD estimates that U.S. net debt is on track to end this year at 66.6% of GDP.

Comment:  Although Mexico's deficit and debt figures look much better than the comparable U.S. figures, it is important to remember that the United States has much more leeway in its finances.  Not only is the U.S. economy much bigger, more diversified, more stable, and more efficient, but the U.S. dollar is the world's main reserve currency.  The global financial markets typically would not long tolerate a lesser-developed country like Mexico having a budget deficit one-tenth the size of the economy or a debt load at two-thirds or more the size of the economy.  Nevertheless, Mexico's government deserves praise for continuing to live within its means, even in the face of a limited tax base and rampant tax evasion.  This self-discipline has helped give the economy a measure of stability in recent years.  It has probably also helped buoy the peso in recent months, especially after the financial markets started to focus on risks coming from countries with big deficits and debts, such as Greece and Spain.  Good public-sector finances look set to continue as an advantage for Mexico, but expanding trade deficits and growing risk aversion in the financial markets still look set to drive the peso lower again in the near term.

Patrick Fearon, CFA
Vice President, Fund Management

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