The Financial Imbalance in Mexico: Stabilization Funds at Critical Levels
The Stabilization Funds for Budgetary Revenues (FEIP) and the Stabilization Fund for State Revenues (FEIEF) have been drastically reduced, putting both public finances and the economy in a worrying situation. By the end of September 2024, the FEIP reported a mere 50.8 billion pesos, which is about one-fifth of what was reached in 2018, when it hit a record balance of 246.7 billion. Meanwhile, the FEIEF accumulated 12.9 billion, representing almost one-sixth of the 76.3 billion reported in 2018. These low balances and the slow recovery of the funds raise alarms about the health of public finances and the future of the Mexican economy, which continues to show signs of weakening.
The Ministry of Finance estimates that the economy could close the year with growth between 2.5% and 3.5%, while for the following year, it expects an increase of between 2% and 3%. This sharply contrasts with projections from private sector economists, such as the Mexican Institute of Finance Executives (IMEF), which forecasts a much more modest growth of 1.5% for 2024 and just 1% for 2025. Similarly, the Bank of Mexico estimates a growth of 1.8% for this year and 1.2% for 2025. On the other hand, the OECD revised down its forecast for the Mexican GDP, cutting it from 2.2% to 1.4% for the end of 2024 and from 2% to 1.2% for 2025. "If we don't manage to grow, public revenues will be lower than expected, especially tax revenues that depend on economic activity. If the balances of the FEIP and FEIEF remain low, governments will have to make cuts or go into debt," pointed out Diego Díaz, coordinator of Public Finance at the Mexican Institute for Competitiveness (IMCO).
Economic imbalances can arise from multiple external factors, as was evident during the pandemic in 2020, when funds were used to cover missing revenues. "The difference today is that there will be no resources to compensate for future unforeseen events," warned Christopher Cernichiaro, a researcher at the Metropolitan Autonomous University (UAM). These funds, primarily fed by tax revenues and excess oil income, reached historic maximum balances in 2018 but began to decline in 2019 due to activations caused by a slight economic contraction. The most drastic drop occurred in 2020 when the Mexican economy contracted by 8.4% due to the pandemic, and since then, it has not been able to return to those levels.
The FEIP accumulated nearly 15 billion annually in 2022 and 2023, but for 2024, it is projected to accumulate only about 9 billion, as explained by José Luis Clavellina from the Center for Economic and Budgetary Research (CIEP). "If this is the accumulation rate, any new crisis will leave fewer resources to cover revenue gaps," he warned. The use of the FEIP is critical for the federal government, and without these funds, only two alternatives remain: cuts to spending or resorting to debt. Both options have significant ramifications; cuts can affect the quality of public services, and debt increases the fiscal deficit, a vital aspect for credit rating agencies. Additionally, state and municipal governments, which depend on federal resources, would also face pressures, having to choose between cutting expenses or taking on debt. "The FEIEF is crucial for replenishing the revenues that states receive; if these resources are lacking, the population will be affected, as they are generally used for essential expenditures like payroll and basic services," clarified Cernichiaro from UAM. Díaz added that some states, depending on their financial health, could be pushed to incur debt, which would more greatly impact those that rely more heavily on federal revenues, such as Hidalgo, Oaxaca, and Guerrero, compared to more self-sufficient states like Mexico City, Chihuahua, and the State of Mexico.
In conclusion, the continued reduction of the stabilization funds highlights the vulnerability of public finances in Mexico. The lack of savings to address economic contingencies could lead to cuts in social spending and an increase in debt, impacting citizens and the quality of services. It is crucial to implement policies focused on recovery and fiscal stability to mitigate these risks.
