Mexico's Stabilization Fund: In the Red

The Budget Revenue Stabilization Funds (FEIP) and the Stabilization Fund for Federal Entities (FEIEF), which are used to cover shortfalls in public revenue when the economy or oil prices fall below what the Ministry of Finance and Public Credit anticipates, are showing alarmingly low levels, reaching as much as six times less than the maximum amounts recorded in 2018. By the end of September 2024, the FEIP reported only 50.804 billion pesos; that is, around one-fifth of what it had in 2018, when it hit a record amount of 246.690 billion. On the other hand, the FEIEF accumulates only 12.886 billion, approximately one-sixth of what was reported in 2018, when it reached 76.348 billion. Concerns are growing over public finances as these funds are low and their recovery is very slow, adding to the expectations of a Mexican economy that continues to decline.

According to the Ministry of Finance, the economy should finish this year with a growth between 2.5% and 3.5%, while next year's expectation is between 2% and 3%. However, these figures are far from the forecasts of private sector analysts, such as the Mexican Institute of Finance Executives (IMEF), which predict only 1.5% growth for 2024 and 1% for 2025. The central bank also has more conservative expectations, estimating growth of 1.8% this year and 1.2% for 2025. On another note, the OECD has revised its forecast for Mexico's GDP down from 2.2% to 1.4% for the end of 2024, and from 2% to 1.2% for 2025. Diego Díaz, public finance coordinator at the Mexican Institute for Competitiveness (IMCO), warned that if the economy does not grow, public revenues will decline, especially tax revenues, which depend on economic activity. If the balances of the FEIP and FEIEF remain low, governments will have to choose between spending cuts or, in the worst-case scenario, going into debt. Christopher Cernichiaro, a postdoctoral researcher at UAM, warned that there won't be resources available to cover contingencies, which is very concerning. In 2018, these funds, which are primarily fed by extraordinary tax and oil revenues, reached record levels but began to decline from 2019 due to economic contraction and fell sharply in 2020 following the pandemic, without being able to recover since then.

In 2022 and 2023, the total for the FEIP hovered around 15 billion annually, but for 2024 it is expected to drop to about 9 billion, according to José Luis Clavellina, director of research at the Center for Economic and Budgetary Research (CIEP). "If this is the new normal for fund accumulation, it will take longer to recover, and in the case of a crisis or slowdown, there will be fewer resources to offset lost revenues," he added. The use of the FEIP is crucial for the stability of the federal government, and without it, the public sector has two options: cuts or borrowing, each with its consequences. Reducing expenses can affect the quality of public services, while increasing debt would raise the fiscal deficit, which is a concern for credit rating agencies, Cernichiaro noted. Given the heavy reliance of state and municipal entities on federal revenues, they would also be forced to cut spending or incur debt. "This FEIEF helps cover lost revenues for states; if those resources are missing, it will directly affect the population, as most of these funds are allocated to regular expenses like pension payments or basic services," detailed the UAM researcher. Díaz emphasized that, depending on the financial health of each state, there may be a possibility of resorting to debt, with those most reliant on federal contributions being the hardest hit. According to IMCO, Mexico City, Chihuahua, and the State of Mexico are the areas that generate the most own revenues, unlike Hidalgo, Oaxaca, and Guerrero, which are the most dependent on federal transfers.

It is crucial for both the federal and state governments to prioritize responsible financial management, especially now when growth projections are uncertain. The lack of savings and the possibility of incurring debt could lead to a vicious cycle of increasing deficits and the deterioration of public services. Maintaining a budget balance and promoting sources of own revenue for the entities is essential to avoid future crises and ensure the well-being of the population.