2024-11-16 15:21:00
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Mexico’s government plans to run a larger deficit than previously expected next year as economists warned that its growth forecast was too optimistic because the country faces an economic slowdown and Donald Trump’s tariff threats.
Mexico’s net borrowing has hit 5.9 per cent of GDP, the highest level since the 1980s, after former President Andrés Manuel López Obrador spent more on social programmes and signature infrastructure projects in the run-up to this year’s election. His party won a landslide victory, but successor President Claudia Sheinbaum has inherited the task of restoring fiscal credibility.
On Friday Sheinbaum’s government said it would cut the deficit to 3.9 per cent of GDP next year, but that is still higher than the 3.5 per cent target she had suggested last month.
The package presented to Mexico’s Congress included sharp cuts to spending across many areas including security, healthcare and defence. It increased spending on social programmes and passenger rail and also included more than $6bn (136bn pesos) in debt payments for struggling state oil company Pemex.
“Compared to other countries in the world, [the budget] seems relatively reasonable, but it implies an increase in the debt-to-GDP ratio to 51.4 per cent, and that level for Mexico is high,” said Luis de la Calle, an economic consultant and former trade negotiator. “It’s clear that to be successful on public finances, this government needs a lot of private investment to expand the tax base.”
The forecast cut in net borrowing — equivalent to 2 per cent of GDP — is the largest since at least the 1990s, according to IMF data.
The government’s projection assumes that Mexico’s growth rate will accelerate next year to between 2 and 3 per cent, up from the 1.4 per cent which analysts project for this year. However a central bank survey in October — before the US election — showed that on average analysts expect growth to be just 1.2 per cent in 2025.
“It’s a relatively responsible budget but it’s not as credible as one would have liked . . . [it] basically exploits the goodwill of investors to take at face value the promises of good behaviour from the government,” said Ernesto Revilla, Chief Economist for Latin America at Citi.
Several analysts said they thought the real deficit would end up higher than the Finance Ministry was forecasting, partly due to lower growth and the difficulty of carrying out sharp public spending cuts.
“I think many of the assumptions on the revenue side but particularly on the expenditure side are a bit stretched . . . It’s not an easy budget to execute,” Revilla said.
Investors in Latin America’s second-largest economy have been unnerved by the ruling party’s radical reform agenda and Trump’s threats of blanket tariffs. Since the Morena party won a supermajority in June, the peso has weakened around 15 per cent against the dollar.
Before the budget was published this week Moody’s lowered its Mexico outlook to “negative”. It rates the country’s debt at Baa2, two notches above junk.
Friday’s budget for 2025 would see public investment cut by 14 per cent to 996bn pesos, including 149bn pesos for an effort to revive passenger railways. Of this, 40bn pesos would go to the massive Maya Train project in the Yucatán peninsula, which was started by López Obrador.
Spending on social programmes also increased, partly due to a new cash payment for women aged between 60 and 64.
There were sharp cutbacks across most other areas of government, including double-digit reductions in health and security, even though citizens have seen the quality of services deteriorate in recent years.
“The new president didn’t have a lot of room to move,” said Alejandra Macías, executive director of think-tank CIEP. “The deficit was reduced but at the cost of cuts that really leave institutions and sectors weaker . . . It’s going to cost us a lot in the coming years.”
Mexico has long had low levels of taxation, at just 17 per cent of GDP compared to an OECD average of 34 per cent in 2022. During her election campaign, Sheinbaum played down the need for fiscal reform but on Friday said that if it were needed her team would work on it next year.
“Given the public finances challenges in the next few years, the government needs to design and implement fiscal reform . . . [focusing] on reducing informality and tax evasion,” analysts at BBVA Mexico said.
Congress still has to approve the budget proposal, though few significant changes are expected.
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What are the potential implications of Mexico’s increased deficit on its long-term economic stability?
**Interview with Luis de la Calle: An Insight into Mexico’s Economic Outlook**
**Interviewer:** Thank you for joining us today, Luis. As an economic consultant and former trade negotiator, you have a keen understanding of Mexico’s current financial scenario. The government has announced plans to run a larger deficit next year than previously expected. What are your thoughts on this decision?
**Luis de la Calle:** Thank you for having me. Yes, the decision to run a larger deficit, with a target of 3.9 percent of GDP, is concerning, especially given Mexico’s current economic climate. While it might be seen as a reasonable step compared to global standards, it reflects a growing debt-to-GDP ratio, which stands at 51.4 percent. This is relatively high for Mexico. We need to focus on fostering private investment to effectively expand the tax base.
**Interviewer:** The government has proposed cuts across various sectors, including security and healthcare, while increasing social program spending. How do you see this balanced approach affecting the economy?
**Luis de la Calle:** That’s an interesting juxtaposition. While increasing social spending can yield short-term political gains, the cuts in other critical areas could impact long-term growth. The sustainability of such a budget heavily relies on improving fiscal credibility and ensuring that these expenditures translate into tangible economic benefits. It will be a challenging budget to execute, as many assumptions about revenue and expenditures seem stretch.
**Interviewer:** The government is predicting a growth rate of 2 to 3 percent next year, despite analysts forecasting only 1.2 percent for 2025. What do you make of these projections?
**Luis de la Calle:** There’s a noticeable disparity there. The aggressive growth forecast appears overly optimistic given the current global economic conditions and the challenges Mexico is facing, particularly from threats of tariffs and broader economic slowdown. Analysts remain skeptical, and if the growth doesn’t materialize as expected, it will further complicate fiscal management.
**Interviewer:** With the peso already weakening against the dollar and Moody’s lowering Mexico’s credit outlook to “negative,” how does this affect investor confidence?
**Luis de la Calle:** Investor sentiment is crucial, especially in an economy like Mexico’s, which relies heavily on foreign investment. The ruling party’s recent reforms and external threats have created uncertainty, leading to a depreciation of the peso. This uncertainty emanating from fiscal and trade policies could deter new investment inflows, exacerbating an already challenging fiscal landscape.
**Interviewer:** what would be your advice to the government moving forward?
**Luis de la Calle:** The government must prioritize restoring fiscal credibility and fostering an environment conducive to private investment. Communicating a clear and executable plan to manage the budget while ensuring steady economic growth is essential. It’s not just about tackling the deficit; it’s about creating a sustainable pathway for future growth that reassures both investors and the public.
**Interviewer:** Thank you, Luis, for your insights on this complex issue. It will be interesting to see how the situation unfolds in the coming months.
**Luis de la Calle:** Thank you! It’s always a pleasure to discuss these important issues.