jueves, 31 de enero de 2013

Public sector debt...

Mexico’s public sector finances were much stronger in 2012 than those of the US. In fiscal year 2012, the US federal government’s deficit came to 6.9% of GDP. Mexico’s was 2.6% of GDP. Adding in states’ debts, Mexico's debt ratio is still below that of the US, which, by the way, doesn’t include state debt either. Excluding investments by Pemex, the deficit was 0.6%. 

Mexico’s debt to GDP ratio is low but there are some troubling signs. Expenditures grew more rapidly than income (respectively, +3.8% and +3.3%, discounting inflation). Oil income, which accounted for a hefty 33.8% of public sector revenues in 2012, was up 3.7% while tax revenues were only 1.4% higher – in a year in which the economy grew close to 4%. A substantial 28.5% jump (again, excluding inflation) in “other” non-tax revenues left total non-tax revenues 16.6% higher than in 2011. The increase in non-tax income accounted for 15.5% of the increase in public sector revenues last year.

miércoles, 30 de enero de 2013

Formal employment in Mexico...

In 2012, the number of Mexican jobs registered in the Mexican Social Security Institute rose by 711,688 (or 4.6%) to 16.1 million. That's to say that roughly one of every four members (27.5%) of the economically active population or PEA (for its initials in Spanish) has a job that's part of the formal economy.

Looking at the distribution between permanent and temporary employment, about 4 1/2 as many permanent jobs were created as temporary ones. Interestingly, though, since 2001 - with the single exception of 2007 - the percentage change in temporary jobs was always greater than the percentage change in permanent jobs.

lunes, 28 de enero de 2013

Greed is driving the markets...

Per CNN Money's "fear and greed" index, the index has moved from "neutral" a month ago to "extreme greed". It certainly explains the rapid run-up in stock prices and the appreciation of the peso we've seen this year.

You can see the index and the components that comprise it at the following link:

viernes, 25 de enero de 2013

A first for Mexico in 15 years...

The 2012 trade figures show Mexico posted a very small US$163 million trade surplus. It's not the country's first trade surplus since 1980. But it is the first time since 1997 that there's been a trade account surplus and that the surplus was posted in a year when the economy grew at a healthy rate. Typically, Mexico's trade surpluses were the consequence of the adjustment to a balance of payments crisis: a maxi-devaluation depresses imports and boosts exports, producing a trade surplus.

High oil prices weren't the reason for the 2012 trade surplus although the average price of Mexican crude last year was the highest ever: oil export income dipped 5.9% in 2012. The key to the surplus was that total export revenue grew at a rate that was half a percentage point higher than the growth rate of imports. Manufactured exports (81.4% of total exports) grew 8.4% while imported intermediate goods (three-quarters of total imports) rose just 5.3%.

If this means that the producers of manufactured exports have been able to substitute domestic suppliers for foreign ones, it implies that faster growth will no longer automatically translate into larger trade account deficits. That would be very good news indeed.

lunes, 21 de enero de 2013

Debt that's NOT included in Mexico's debt to GDP ratio...

That state and municipal debt is NOT included in the public sector debt to GDP ratio published by Hacienda wasn't an issue for decades. When states started to borrow against the monies they receive from the federal government in the form of participaciones, the story changed. State and municipal debt soared in less than a decade, heading for 3% of GDP.

Armando Rios Piter, the Secretary of the Special Commission for Analysis and Oversight of Public Finances, says that state and municipal debt totals Ps$406.8 billion pesos, most of which has been used to pay for current expenditures. Never mind that such use violates the law, which states that loans can only be used for works that directly increase public revenues. The debt of four states, he says, accounts for a quarter (25.9%) of the total. Nine states have debt that virtually equals or exceeds the participaciones they receive from the federal government. They are: Veracruz (94.5%), Mexico City (96.0%), Sonora (97.6%), Michoacan (98.7%), Nayarit (111.8%), Chihuahua (118.4%), Nuevo Leon (165.9%), Quintana Roo (204.2%), and Coahuila (304.6%).

The regulations Rios Piter hopes to see would limit the debt of Mexico's states to their capacity to pay. He also is looking for an authorization process that would start with a request to Hacienda and require authorization by the Senate.

Congratulations to the new Administration for tackling the issue that, if left alone, could become the next fiscal black hole. Limiting states' ability to contract debt as well as bringing greater transparency and accountability to the process is a giant step forward. It also has the political benefit of giving the President more control over governors.

sábado, 19 de enero de 2013

US debt ceiling debacle averted?

Friday saw House Republicans propose a deal that would lengthen the fuse on the debt ceiling debate. If President Obama accepts it, House Republicans would vote to raise the debt ceiling for three months provided that both chambers of Congress pass a budget during that period.

The US Government passed its debt ceiling on December 26. Thanks to the cash management techniques that businesspeople know so well, the Treasury doesn't expect to  run out of cash with which to pay the expenditures Congress has already approved until the end of February. If the debt ceiling isn't raised, the US Government would default. Raising the debt ceiling is a regular occurrence.

The last time the debt ceiling went down to the wire was in the summer of 2011. The consequence of that bitter battle was the loss of the Government's AAA credit rating and the reduction of its borrowing cost. Yes, you read that correctly: although economic theory says the interest rate the US Government paid to borrow should have risen, in fact, rates declined. Don't count on that happening again, though. The decline in borrowing cost had everything to do with the state of the world economy and the European crisis. It was NOT a vote of confidence in US politicians.

The "must agree to a budget" provision of the Republican proposal is aimed squarely at Senate Democrats. They've blocked putting a budget blueprint on the Senate floor for the past four years, never mind that it violates the 1974 Budget Control Act.

If the three-month extension deal is made, it should quiet the markets, at least until and unless it looks like Congress can’t agree on a budget and the three months are drawing to a close. 

A deal doesn't guarantee calm in the market. There are two other deadlines coming up. One is the automatic spending cuts which were to take effect at the beginning of January. The "fiscal cliff" deal just postponed them for two months. Another trigger is the continuing resolution to extend the federal government’s appropriations authority. If Congress doesn't pass it by March 27, the government can not spend on non-essential items. 

Any issue that casts doubt on the ability of US politicians to agree on a plan to address the deficit or, worse still, for the government to meet its financial obligations can upset markets.  

jueves, 10 de enero de 2013

Now, the debt ceiling...

Politicians sent the US went over the fiscal cliff, then quickly reversed direction. The fiscal cliff won't drive the US economy into recession this year. However, the deal on taxes  doesn't give us a respite from the bitter disagreement about how to address the US government's deficit. We're told that in February the US Government will have exhausted the cash flow management techniques that are permitting it to pay its bills even though the debt ceiling hasn't been raised. In short, if an agreement isn't reached or a way to keep paying bills without an agreement isn't found, the US Government will default on its bills.

Voting to raise the debt ceiling used to be routine. After all, Congress already voted to approve the expenditures that won't be paid if the debt ceiling isn't raised. Raising the debt ceiling isn't routine anymore. It's become incredibly acrimonious: the late summer 2011 iteration caused the US Government to lose its AAA bond rating. Why has a formerly routine vote become so difficult? House Republicans use the occasion to push for the spending cuts they believe are necessary to cut the deficit.

The approach of February has triggered creative ideas for avoiding default. One is for the Treasury to print script. Another is the minting of a trillion dollar coin. Links to articles discussing each idea are posted below. Default would NOT benefit the country.

script: http://www.nytimes.com/2013/01/10/opinion/an-escape-hatch-for-the-debt-ceiling.html?ref=opinion&_r=0

trillion dollar coin: http://www.theatlantic.com/business/archive/2013/01/everything-you-need-to-know-about-the-crazy-plan-to-save-the-economy-with-a-trillion-dollar-coin/266839/