Mexico's Income Stabilization Funds Are at Critical Levels

The Budgetary Income Stabilization Fund (FEIP) and the Stabilization Fund for State Revenues (FEIEF), which are essential for mitigating public income shortfalls when the economy or oil prices decline more than expected by the Ministry of Finance and Public Credit in the Economic Package, are showing balances that are up to six times lower than the maximum levels recorded in 2018. By the end of September 2024, the FEIP reported a total of 50.8 billion pesos; this represents nearly one-fifth of what was reported in 2018, when it reached a record balance of 246.7 billion pesos. Meanwhile, the FEIEF had a total of 12.9 billion pesos, which is almost one-sixth of what was recorded in 2018, when it rose to 76.3 billion pesos. This situation is alarming for public finances due to the low levels and slow recovery of these funds, coupled with gloomy prospects for the Mexican economy.

The Ministry of Finance expects the economy to close this year with growth between 2.5% and 3.5%, while for the following year, they anticipate an increase between 2% and 3%. However, these expectations are far from the forecasts of private sector experts, such as the Mexican Institute of Finance Executives (IMEF), which estimates growth of 1.5% for 2024 and just 1% for 2025. Similarly, the central bank estimates growth of 1.8% for this year and 1.2% for 2025. The Organization for Economic Cooperation and Development (OECD) has also cut its projection for Mexico's GDP, lowering it from 2.2% to 1.4% for the end of 2024, and from 2% to 1.2% for 2025. “If we aren't growing in practice, this will translate into lower public income than planned, mainly taxes, which depend largely on economic activity. If the FEIP and the FEIEF remain at these levels, governments will have to cut back or increase their debt,” said Diego Díaz, coordinator of Public Finances at the Mexican Institute for Competitiveness (IMCO). No country is immune to imbalances due to external factors, such as the pandemic in 2020, when resources from these funds were used to alleviate budget shortfalls. “The current difference is that in the event of any eventuality, there will be no money to cover the necessary resources,” warned Christopher Cernichiaro, a postdoctoral researcher at the Autonomous Metropolitan University (UAM). In 2018, these funds, which are primarily fed by surplus tax and oil revenues, recorded maximum balances but began to decline in 2019 due to their activation amid a 0.2% economic contraction. The sharpest decline occurred in 2020, when the Mexican economy plummeted by 8.4% due to the pandemic, and since then they have not been able to recover.

For 2022 and 2023, the FEIP accumulated close to 15 billion pesos each year, but it is estimated that for 2024, this accumulation will drop to about 9 billion pesos, as explained by José Luis Clavellina, director of Research at the Center for Economic and Budgetary Research (CIEP). “If this is the pace of accumulation, it will take us longer to have available funds, and if another crisis occurs, we will have fewer resources to cover the missing income,” added the researcher. The use of the FEIP is crucial to compensate for the resources lacking at the federal government level. Without these funds, the public sector faces two alternatives: making cuts or increasing its debt. Both decisions have their consequences. Cutting back could lead to a decline in the quality of public services, while accruing debt increases the fiscal deficit, which is monitored by rating agencies, Cernichiaro explained. Since state and municipal governments heavily rely on federal income, they would also face pressure to cut their spending or resort to borrowing. “This FEIEF is used to replenish state revenues; if these resources are lacking, the population will bear the consequences, as most of these funds are allocated to current spending, payment of pensions from state systems, or even expenses like electricity,” the UAM researcher clarified. According to Díaz, the possibility of resorting to debt will depend on the financial condition of each state. “Those that depend the most on federal income could be the hardest hit,” he noted. Data from IMCO shows that entities like Mexico City, Chihuahua, and the State of Mexico generate more of their own income, while Hidalgo, Oaxaca, and Guerrero are the states that depend most on federal transfers.

It is concerning that the lack of stabilization funds is affecting the country's financial health. The heavy reliance of states on federal income underscores the need to diversify revenue sources and strengthen fiscal management. Long-term economic sustainability requires careful planning and effective financial management to avoid a deeper crisis in the future.