A damaged Mexico, hit by the coronavirus, will present a tight budget for 2021

MEXICO CITY (Reuters) – Mexico faces a tough balancing act in its 2021 budget, trying to revive an economy severely beaten by the coronavirus pandemic while sticking to Andres Manuel Lopez Obrador’s promises of austerity.

When Finance Ministry officials present the budget bill to Congress’s lower house later Tuesday, debt investors from both Mexico and its state oil company, Pemex, will examine spending priorities.

Lopez Obrador is an atypical case among rich and emerging nations, and he insists on strict spending limits even in the face of the economic destruction caused by coronavirus confinements.

The economy that López Obrador promised to revive is in the deepest recession since the Great Depression of the 1930s. Mexico’s central bank recently warned that it could contract by as much as 13% this year.

While Brazil has squandered an additional 6.5% of the Gross Domestic Product (GDP) on spending, including unemployment benefits, which reaches a third of its citizens, Mexico’s spending balance has deteriorated by less than 1%.

The Mexican president has shown no signs of changing course, arguing that his discipline will leave finances healthier when the dust settles, while ruling out more taxes or new social programs.

Carlos Serrano, Mexican economist for the country’s largest bank, BBVA, said that an anti-cyclical fiscal policy would be more appropriate now.

“This is not the time to implement an austere fiscal policy,” Serrano said in an interview. “This should be accompanied by an announcement of a fiscal reform that will take effect once the pandemic crisis is over, and that will help finance additional spending,” he said.

Erasmo Gonzalez, who chairs the House budget committee, told Reuters that there would be a primary deficit in 2021, without going into details. Budget guidelines published earlier this year projected a primary deficit of 0.6% of GDP. Mexico was already in a mild recession before the epidemic.

In the central bank’s most optimistic scenario, Latin America’s second-largest economy will be smaller by the end of next year than before the pandemic hit the Americas. It may only fully recover in 2022.

Even without additional borrowing, the debt-to-GDP ratio has increased by more than ten basis points as the economy contracted and the peso weakened.

The rating agencies, which stripped Pemex of investment-grade this year and warned that Mexico’s sovereign debt could suffer the same fate, are watching for signs of future fiscal reform and strategies to curb the oil company’s indebtedness. Lisa Schineller, Standard & Poor’s lead analyst for Latin America, said that in addition to its usual focus on fiscal results in the budget, the agency was very interested in plans to recover from the coronavirus’s impact.

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