Mexico’s New Government: Limited Impact on Macroeconomics but Pressure on Public Finances in the Future

The change in government in Mexico is expected to have limited impact on the country’s macroeconomic indicators, as the new administration led by Claudia Sheinbaum plans a gradual fiscal consolidation to prevent a loss of investment grade from risk rating agencies. According to an analysis presented by Citibanamex at the end of the second quarter, uncertainty and increased risks of negative scenarios could lead to a deterioration of financial variables, affecting investment, growth, and public finances.

Although Mexico will experience a modest macroeconomic impact, the room for maneuver to achieve fiscal consolidation is already narrow and is predicted to narrow further. Revenues increased by 2.4 percent in real terms between January and April but were 4 billion pesos below the Ministry of Finance and Public Credit’s budget, mainly due to lower oil revenues and below-anticipated tax collection. Public spending rose by 18.8 percent in real terms in the first quarter, the highest since 1990, comparable only to the fiscal policy measures taken during the 2009 global financial crisis.

The new macroeconomic scenario will have slight impacts on public deficit estimates, as the negative effects of lower growth and higher interest rates are mostly balanced by those of a more depreciated exchange rate. However, Citibanamex predicts pressures on the stability of public finances in 2024 and 2025 due to rising debt levels resulting from government spending on COVID-19 relief efforts.