MEXICO CITY, April 23 — Mexico will increase spending on social programs and infrastructure projects by US$25.6 billion (RM111.6 billion), President Andres Manuel Lopez Obrador said yesterday, in a delayed attempt to jump-start the coronavirus-hit economy.
Economists said the move was a welcome relaxation of Lopez Obrador’s rigid adherence to frugality during the first weeks of the crisis, but warned a lack of support for big businesses could lead to bankruptcies affecting jobs and tax revenue.
It was not immediately clear how much of the package represented increases over previously budgeted spending, or if it was mainly about shifting where funds were allocated. IFR reported that Mexico announced a US dollar bond offering yesterday.
Lopez Obrador’s announcement comes a day after the central bank on Tuesday unveiled US$31 billion and an interest rate cut in support for the financial system, with about a third destined to a financing facility for banks to boost lending.
“Efficiency, honesty and austerity will allow us to increase the budget to strengthen social programs and critical projects by 622,556 million pesos (US$25.6 billion),” Lopez Obrador said at his regular morning news conference.
The announced package was short on details, but appeared to go far beyond the US$2.5 billion he last week said the government was preparing to inject into the economy in May.
Nikhil Sanghani, an economist at London-based Capital Economics, warned the economy still risked going into a deep recession without greater support.
He said that at around 3 per cent of GDP, the package was far smaller than the fiscal stimulus enacted in other emerging markets.
“We fear that this has come too late in the day. That’s why we still expect an 8 per cent fall in Mexico’s GDP this year, and only a gradual recovery after the coronavirus shock,” Sanghani said.
Lopez Obrador said the package would be financed through spending cuts in non-essential areas and a reduction of up to 25 per cent in high-level bureaucrat’s salaries, including his own.
He said he would not “indebt” the country, or increase revenue through higher taxes or fuel price hikes.
Later yesterday, Mexico’s finance ministry announced it had concluded US$6 billon in bond sales, stressing in a statement that the bonds were nearly five times oversubscribed, reflecting historic demand for such an issuance.
“The strong demand observed during today’s transaction... shows enormous confidence of international investors in the country and in its management of economic policy,” the ministry said, adding that the bonds do not exceed debt limits set by law.
IFR had earlier reported that Mexico had gone to market seeking a three-part US dollar bond, but without specifying the amount. Citing an SEC filing, IFR reported that the proceeds will go toward general purposes, including refinancing, repurchasing, or retirement of domestic and external debt.
Key energy, health and security sectors, and social programs and his flagship infrastructure projects, such as a new airport and refinery will be strengthened by the stimulus package, Lopez Obrador said.
The left-leaning leader repeated his vow to issue 3 million loans for small businesses in the formal and informal economy and to create 2 million jobs.
“This will make it possible to protect 70 per cent of Mexican families, equivalent to 25 million homes, especially the poor and middle class,” Lopez Obrador said.
It was not immediately clear what areas would face cuts or how 2 million jobs would be created amid a steepening recession.
“Beyond the headline figures and the promise to protect 70 per cent of the Mexican households, the specifics about the programs that will accomplish that are still lacking,” said Alberto Ramos, economist at Goldman Sachs.
Ramos said Mexico has more fiscal space than many of its peers for a significant package to support both vulnerable citizens and business, but that it was still resistant to help companies that provide jobs and pay taxes.
“If they are not assisted and go bankrupt, the social pressures will intensify and the budget suffers as tax collection declines,” he said. — Reuters
