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Fitch: Mexico's optimistic revenue outlook poses risks to primary surplus goal

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Fitch: Mexico's optimistic revenue outlook poses risks to primary surplus goal

Optimistic expectations for GDP growth and revenues in Mexico's 2020 budget proposal present risks to the country's primary surplus target, Fitch Ratings said Sept. 16.

Mexico's finance ministry has set a primary surplus target of 0.7% of GDP in the proposal, reflecting "past prudent fiscal policy" and "continued commitment to stabilizing the public debt ratio," Fitch said.

However, the rating agency sees risks in the government's revenue goal given positive macroeconomic and oil production assumptions. Mexico's GDP growth forecast is at about 2% next year, higher than Fitch's latest forecast of 1.8%.

The government also believes that oil production will reach an average of 1.95 million barrels a day, compared to the current 1.7 million barrels a day, and it expects revenues to rise. However, Fitch noted that oil production has dropped below expectations in 2019, with government oil income sliding by 0.5 percentage point of GDP.

Moreover, the increase in oil revenue will be absorbed by state company Petróleos Mexicanos SA de CV, which Fitch described as "an important source of revenue, but also a contingent liability." The additional injection planned for Pemex will fall short of supporting the company's investment plans, Fitch added, which will result in the need for additional government funding.

Risks to the primary surplus goal could prompt the use of the state stabilization fund or other fiscal adjustments, Fitch said.

"The 2020 budget shows little sign that the government intends to combat low growth via looser fiscal policy," the rating agency noted. "And with a self-imposed ban on raising or imposing new tax rates expiring in 2021 it will more likely pursue fiscal reform to raise revenues."