Mexico unveils $26bn coronavirus stimulus, but is it too late?
Money for the package will come from reduced spending and salary cuts for high-level bureaucrats, president says.
Mexico will increase spending on social programmes and infrastructure projects by $25.6bn, President Andres Manuel Lopez Obrador said on Wednesday. The move is 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. Still, they warned a lack of support for big businesses could lead to bankruptcies affecting jobs and tax revenue.
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It was not immediately clear how much the package represented increases over previously budgeted spending or if it were mainly a shift in where funds were allocated. IFR reported that Mexico announced a United States dollar bond offering on Wednesday.
Lopez Obrador’s announcement comes a day after the central bank on Tuesday unveiled $31bn 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 programmes and critical projects by 622,556 million pesos ($25.6bn),” Lopez Obrador said at his regular morning news conference.
The announced package was short on details but appeared to go far beyond the $2.5bn 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 a deep recession without greater support.
He said that at around 3 percent 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 percent 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 percent 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.
IFR reported that Mexico had gone to market seeking a three-part US dollar bond, in what could be a move to release funds by replacing short-term debt with longer maturities. IFR did not specify the amount being sought.
Proceeds will go toward general purposes, including refinancing, repurchasing, or retirement of domestic and external debt, IFR said, citing an SEC filing.
Key energy, health and security sectors, and social programmes and his flagship infrastructure projects, such as a new airport and refinery, will be strengthened by the package, Lopez Obrador said.
The left-leaning leader repeated his vow to issue three million loans for small businesses in the formal and informal economy and to create two million jobs.
“This will make it possible to protect 70 percent 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 two million jobs would be created amid a steepening recession.
“Beyond the headline figures and the promise to protect 70 percent of the Mexican households, the specifics about the programmes that will accomplish that are still lacking,” said Alberto Ramos, an 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.