Mexico unveils $26bn virus spending plan, but will it be enough?

President Lopez Obrador’s move is a reversal of the fiscal prudence he was urging in the early weeks of the crisis.

Mexico coronavirus economy
The latest economic rescue plan appears to go far beyond earlier measures, but economists warn it is short on details and may still not be enough to avoid a deep recession [Gustavo Graf/Reuters]

Mexico will increase spending on social programmes and infrastructure projects by $25.6bn, President Andres Manuel Lopez Obrador has said, 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 it was not immediately clear how much of the package represented increases over previously budgeted spending.

Lopez Obrador said on Wednesday he would not take on new debt to finance the package, promising instead to shift funds from other areas of government in Latin America’s second-biggest economy.

The announcement was followed by news Mexico had issued $6bn in bonds partly to guarantee resources for the coronavirus response. The finance minister said the issuance did not exceed already authorised debt limits.

On Tuesday, the central bank unveiled $31bn in stimulus 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.

Energy, health and security, along with social programmes and flagship infrastructure projects such as an airport and refinery will be strengthened by the package, Lopez Obrador said.

The announcement was short on details, but appeared to go far beyond $2.5bn he last week said the government was preparing to inject 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 at about 3 percent of the gross domestic product (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 bureaucrats’ salaries, including his own.

He said he would not increase revenue through higher taxes or fuel price hikes.

Mexico’s finance ministry said it placed bonds with five-year, 12-year and 31-year maturities with yields of between 4.125 percent and 5 percent. It said the $6bn issue was one of the country’s largest, and that strong demand showed investor confidence in the government’s economic management.

“This measure helps consolidate the [government’s] funding sources, guarantees resources to face the crisis derived from #Covid19, as well as operate programs and attend any future adversity,” Finance Minister Arturo Herrera said on Twitter.

Left-leaning Lopez Obrador repeated a promise to grant 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.

“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 peers for a significant package to support 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.

Source: Reuters