Economics: Additional social programs and lack of fiscal reform spell further deterioration of public finances

MEXICO - Report 29 Oct 2024 by Mauricio González and Francisco González

The Ministry of Finance will deliver the 2025 Economic Package to the Chamber of Deputies on November 15. Only then will it be possible to learn in detail about the current government's policies, ostensibly aimed at reducing the fiscal deficit, guaranteeing the financing of social programs and investing in infrastructure. However, based on our analysis, those objectives seem out of reach.

In the context of the prolonged deterioration of public finances, Claudia Sheinbaum has announced new cash-transfer social programs, making the goal of reducing the public deficit from 5.9% estimated by the Ministry of Finance for 2024 to 3.5% in 2025 unfeasible. More than three fourths of social spending is earmarked for social programs that will continue to expand given they are of proven value to support the Morena regime. Moreover, the government must manage other mandatory expenses such as public pensions, federal revenue sharing with states and municipalities, and apparently unlimited support for Pemex and CFE.

In this week’s Economic Outlook, we analyze the extent to which steep and growing public deficit levels and their reflection on the public debt constitute one of the greatest risks for the Mexican economy. This risk could prompt sovereign rating downgrades that would push interest rates higher, along with uncertainty for economic agents in a chain reaction that would inhibit investment and the prospects for economic recovery.

In last week's indicators, the Global Index of Economic Activity (IGAE) saw its rate of annual growth return to its seasonally adjusted deceleration trend in August, following a slight respite in July. On a sequential basis, the IGAE fell 0.3% in response to setbacks in primary and secondary activities. A rebound in non core consumer prices during the first fortnight of October prompted a similar resurgence of headline inflation, while the core rate slipped slightly.

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