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 long-term effects of the government’s decision to run a 3.9% GDP deficit on Mexico’s economy and social programs?
**Interview with Luis de la Calle: Insights on Mexico’s Economic Challenges and Government Budgeting**
**Interviewer**: Thank you for joining us, Luis. Let’s dive straight into the recent developments in Mexico’s economy. The government has announced plans to run a deficit of 3.9% of GDP next year, which is higher than previous targets. What are your thoughts on this decision amid concerns about economic growth?
**Luis de la Calle**: Thanks for having me. Yes, the decision to set a deficit at 3.9% reflects the challenging balancing act that President Claudia Sheinbaum’s administration faces. Given the legacy of high net borrowing under former President López Obrador—5.9% of GDP—it was imperative for the Sheinbaum administration to attempt to signal fiscal responsibility. However, aiming for 3.9% while still addressing critical social and infrastructural needs illustrates a tough compromise.
**Interviewer**: You mentioned the significant spending cuts across sectors like security and healthcare. How do you think these cuts will impact the populace and the economy overall?
**Luis de la Calle**: The cuts are certainly a contentious issue. While reducing government spending might seem prudent on paper, these sectors are vital for public welfare and overall safety. Reducing investment here could lead to longer-term societal issues that might negate any short-term fiscal gains. It’s a high-stakes gamble that the government must navigate carefully, especially when social programs also see increased budgets.
**Interviewer**: There’s a forecast that Mexico’s growth rate could accelerate to between 2% to 3% next year, up from 1.4% anticipated for this year. Do you believe this is realistic given the economic headwinds?
**Luis de la Calle**: The forecast is optimistic. A lot will depend on external factors, particularly the U.S. economy, and how global economic conditions evolve. Given the tightening of macrofinancial conditions and persistent uncertainties—like potential trade disputes exacerbated by U.S. political dynamics—the growth reality might end up being less rosy than projected.
**Interviewer**: You’ve highlighted the importance of private investment for expanding the tax base. What strategies could the government employ to attract more private investment?
**Luis de la Calle**: Generally, setting a stable and predictable regulatory environment is essential. Ensuring transparency and supporting economic reforms that enhance the ease of doing business would go a long way. Additionally, restoring confidence in public finances through credible budgeting and targeted incentives for private sector engagement can help attract investment.
**Interviewer**: Lastly, with the peso having weakened significantly against the dollar recently, how could this affect Mexico’s economic landscape going forward?
**Luis de la Calle**: A weaker peso can have mixed effects. On one hand, it may boost exports by making them cheaper for foreign buyers, supporting growth. On the other hand, it increases the cost of imports and can contribute to inflation, which put additional pressure on consumers and businesses. This duality means that the government needs to tread carefully as it formulates policies that stabilize the currency while fostering growth.
**Interviewer**: Thank you, Luis. Your insights help illuminate the complexities of Mexico’s current economic situation and the government’s challenging path ahead.
**Luis de la Calle**: Thank you for having me. It’s an important discussion to have, especially as these decisions will impact many lives in the coming years.