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 is Luis de la Calle’s perspective on the implications of Mexico’s increased fiscal deficit for future economic stability?
**Interview with Luis de la Calle, Economic Consultant and Former Trade Negotiator**
**Editor:** Thank you for joining us today, Luis. Following the recent announcement about Mexico’s fiscal deficit plans for 2025, how do you view the government’s decision to run a larger deficit than initially projected?
**Luis de la Calle:** Thank you for having me. The government’s decision to allow a deficit of 3.9% of GDP, higher than the previously suggested target of 3.5%, reflects the challenging fiscal climate we are in. While they are attempting to address social needs and maintain infrastructure spending, this increase is concerning, especially given our current economic context.
**Editor:** How does the current deficit level compare to historical data, and what implications does that have for Mexico’s economy?
**Luis de la Calle:** Currently, Mexico’s net borrowing stands at 5.9% of GDP, the highest since the 1980s. This is significant because it marks a shift towards a level of indebtedness that could strain our fiscal credibility. The increase in the debt-to-GDP ratio to 51.4% is particularly high for us. Going forward, it shows that the government will need to attract substantial private investment to expand the tax base to manage this responsibly.
**Editor:** There are projections that anticipate a growth rate of 2-3% next year, which is an increase from the 1.4% expected for this year. What’s your take on these growth projections?
**Luis de la Calle:** It’s certainly optimistic. Given that analysts are projecting even lower growth for the following years, such as 1.2% in 2025, it raises questions about the feasibility of these ambitious forecasts. Analysts are rightfully concerned that expectations on both revenue and expenditure sides are somewhat overreaching, and the implementation of spending cuts might be more challenging than suggested.
**Editor:** Can you elaborate on the reaction from investors regarding the government’s spending cuts and the political environment, especially in light of the ongoing tariff threats from Donald Trump?
**Luis de la Calle:** Investors are understandably wary. The ruling party’s reform agenda, combined with external threats, contributes to volatility in the peso and uncertainty in the market. The recent negative outlook from Moody’s also indicates dissatisfaction with how the government is navigating these fiscal challenges. Trust from investors is crucial, and it appears the government needs to rebuild that through credible policies and actions.
**Editor:** what do you think will be necessary for Mexico to achieve a sustainable fiscal path moving forward?
**Luis de la Calle:** Achieving sustainability will require a mix of realistic budgetary practices, genuine growth in private investment, and perhaps a more collaborative approach with investors to ensure that fiscal measures are feasible. The government needs to assure that its fiscal behavior aligns with realistic growth expectations and economic conditions.
