NEW YORK — Mexico’s 2022 budget assumptions may prove too optimistic for Wall Street.

Analysts at Morgan Stanley see no surprises on the spending priorities set for next year by the administration of President Andres Manuel Lopez Obrador. Things are a bit different when you consider the gross domestic product growth expected: 4.1% by the government compared with only 2.9% projected by the New York-based investment bank.

In a new report the bank says external and domestic consumption will lift Mexico’s economic growth for the rest of 2021 and 2022, but the analysts are more cautious than the government officials given a lower U.S. expansion expected in the months ahead and the surge of COVID-19 cases that would “marginally affect” consumer spending in Latin America’s second-largest economy.

But there’s also another reason for the discrepancy: Mexican authorities are projecting a fiscal deficit of 3.2% of the gross domestic product for next year while Morgan Stanley sees that number at 3.4%. “Slightly wider fiscal metrics are a result of a structural shift higher in inflexible spending and the government’s decision to avoid hiking taxes or imposing new ones,” the analysts said in the report dated September 24. “The tools to increase non-oil tax revenues remain centered on efforts to reduce tax evasion, which we think have diminishing marginal returns.”

As it’s been the case in the first part of AMLO’s government, Mexico’s budget keeps the administration’s focus on social programs, infrastructure projects and Petroleos Mexicanos spending, “yet there is also acknowledgment that fiscal metrics are set for deterioration at the margin, both this year and next,” economists Fernando Sedano, Simon Weaver, Lucas Almeida and Emma Cerda said in the report.

The analysts raise the need to work on a tax reform. “So far, helping Pemex finances is not having a major impact on fiscal metrics, but once non-tax revenues and cash balances become insufficient, this strategy will start biting. If fiscal responsibility is to prevail without the need to materially cut spending, a tax reform (that increases tax rates or imposes new taxes) might be needed, assuming priorities remain unchanged,” they argue.

Buying Pemex Debt

The analysts consider that a lower tax burden on the state-owned oil conglomerate, high oil international prices still expected in 2022 and slightly higher crude production will have a material and positive impact in Pemex’ cash flows. Citing still cheap valuation vs sovereign bonds in the 10-year tenor,  the analysts suggest buying Pemex USD 2050 bond.

Mexico’s investment grade rating “does not seem at risk for now,” but the analysts acknowledge that investors and credit risk companies may start questioning it “over time absent a structural shift higher in non-oil tax revenues,” they said.

The 2022 budget submitted to the Congress by Finance Minister Rogelio Ramirez de la O prioritizes spending on ongoing investment projects, such as the Mayan train and Istmo de Tehuantepec inter-oceanic rail project, while social expenditure pivots on increasing pension spending.