During the last two years, the public sector has established itself as the main user of the financing flows received by the Mexican economy, well above the private sector. This is understandable if one considers that, according to the Center for Economic and Budgetary Research, in 2023 alone the Federal Expenditure Budget Project proposes allocating 63.2% of the total expenditure to pension items, the financial cost of federalized debt and spending.
In a context of higher interest rates and given the reduced fiscal space, it is worth reviewing the trends of the other part of the equation, that is, the economy’s sources of financing. In general terms, two main trends can be distinguished.
The first is the reduction of external financing. According to Banxico, external financing flows went from 1.0% to -0.8% of GDP between 2019 and 2021, due to the lower appetite of non-residents for government debt in national currency. In fact, between March 2020 and June 2022, non-resident government bond holdings fell by about $28.5 billion. This, despite high global liquidity and the significant rise in Mexico’s interest rate.
Although it is true that the lower appetite for government debt by non-residents was compensated, on this occasion, by the demand of national investors (v.gr. banks and Siefores), we must not lose sight of the fact that reflects a vulnerable situation.
The possibility that the Mexican economy has had of attracting foreign capital in exchange for a fixed rate in national currency has meant a great advantage in terms of financing, so its absence could represent risks of increasing the debt in foreign currency.
Additionally, the greater exposure of the banking system to public debt poses a risk to macro-financial stability in the face of an adverse economic environment, as highlighted by the International Monetary Fund (IMF) in its most recent Report on Financial Stability.
The second trend in financing sources is the unusual increase in the domestic component, which has even offset the drop in external sources. According to Banxico, in 2020 and 2021 the annual flow of resources from internal sources averaged 8.4 percentage points of GDP, a figure 57.5% above the average registered between 2010 and 2018.
This increase can be explained by the higher precautionary savings, as a result of the pandemic, and was supported by a 22.5% increase in real terms in the demand deposits of the different private holders between February 2020 and December 2021.
However, during 2022 there has been a drop in this availability of resources and given the increase in consumption, influenced by the reduction in cases of COVID19, it would be expected to return to levels close to those seen between 2010 and 2019.
In short, the Mexican economy has fewer external sources of financing, internal sources that are losing strength, and a public sector with ever-increasing inertial spending needs. These conditions make the economy more vulnerable and, given the current environment of higher interest rates, could lead to a significant shift in financing to the private sector. At the moment, the situation is far from being a crisis, but we will have to be careful that the vulnerabilities do not translate into a risk scenario.
*The author is a principal economist at BBVA Mexico.
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