By Michael O’Boyle and Luis Rojas
Mexico’s government cut its 2015 budget by nearly 3 percent on Friday after a drop in global oil prices hurt public finances, and it is shelving a tainted $3.75 billion high-speed train tender as part of its austerity measures.
Finance Minister Luis Videgaray said the cuts were intended to reassure global investors that Mexico will keep its finances in order and he promised they would not derail an economic recovery this year.
“We have to take decisions because our budgetary reality has changed,” Videgaray told a news conference.
He said the government was shelving, for now, a project to build the rail link betweenMexico City and the central city of Queretaro.
China Railway Construction Corp (CRCC) had looked poised to clinch the contract even after its original winning bid was revoked when it became engulfed in the scandal.
Pena Nieto’s family and Videgaray bought homes from a government contractor that was part of the consortium that won the original train tender, raising concerns about corruption and conflicts of interest.
Analysts worry that Mexico’s political crisis could further undermine implementation of a raft of major economic reforms seen as key to helping stem a slide in domestic oil output and bolster growth.
The finance ministry still expects the economy to grow between 3.2 percent and 4.2 percent this year, Videgaray said. But in a client note, Barclays said it sees the cuts leading to a 40 basis point reduction in growth.
Videgaray said Mexico would cut spending by 124.3 billion pesos ($8.29 billion) this year, equal to 2.6 percent of the 2015 spending plan. The government uses oil revenues to fund about a third of its budget. Strategists said Mexico’s cuts were a bid to insulate its financial markets from the current bout of global volatility. Foreign investors now hold more than 2 trillion pesos ($133 billion) of debt, nearly 40 percent of the stock.
“They are thinking about the huge amount of money that has entered Mexico and they well know that if they don’t manage public finances properly, foreigners could get worried,” said Salvador Orozco, a strategist at Santander in Mexico City.
A hike in U.S. interest rates, seen later this year, could spur a reversal in a tide of investment that has flooded into emerging markets in recent years.
Videgaray said the government would rely on austerity measures, but not tax hikes or more debt. A brand new multi-billion dollar airport project for Mexico city will not be affected, he said.