The economic challenges of the next president of Mexico  

México, Ciudad de México. 26 de junio de 2019. Aspecto del Ángel de la Independencia, ubicado sobre Paseo de la Reforma en la CDMX. Foto: Omar Franco/Milenio Diario

The Monthly Survey of Expectations of the Mexican Institute of Finance Executives (IMEF) forecast in January a growth of 1.2% for 2023 and 2% for 2024; for July they were modified to 2.4% and 1.8%, respectively. 

“The data from the United States came out almost double what was expected and that reinforces the perception that there will be no recession, at least, not in 2023. There has been talk of a recession for almost more than a year that has not materialized”, Gabriel Yorio, Undersecretary of Finance, told the press when presenting the report on public finances and debt for the second quarter. 

Since September of last year, the SHCP has forecast 3% growth for the Mexican economy. In the middle of the year, considering the investments that nearshoring brings, they expect it to be higher than this forecast. For 2024 it also foresees 3%, but in a lower range (1.6-3.0%) than the estimate for this year (2.2-3.0%). 

“It is highly probable that next year will be complicated in economic terms, and not so much because of the electoral issue, but because a slowdown is expected in the United States and, probably, in Mexico. So, the first challenge that the new administration will encounter is going to be reactivating the economy from this possible slowdown next year, and this just from the start”, considers Luis Gonzali, Vice President and Director of Investments at Franklin Templenton. 

Right from the start, reactivating the economy involves actions of all kinds: financial, educational, fiscal, security, legal, and political.  

The strength of the government to contribute to economic growth and the attraction of investments is in the exercise of public spending, especially, the one focused on the development of public works such as highways, airports, collective transport systems, highways, seaports for the movement of goods and people, explains Christopher Cernichiaro, a postdoctoral researcher at the Autonomous Metropolitan University (UAM). 

“The new government is going to have the golden age of nearshoring, investments are just beginning, and it will happen when it is taking place and there are more investments. A key challenge is the issue of infrastructure in terms of water and electricity so that nearshoring investments continue to arrive”, says Gabriel Casillas, chief economist for Latin America at Barclays. 

One of the challenges of this government has been to recover the physical investment that has been falling since 2015 and keep it above the cost of the debt. This happened in 2021 and 2022, but 2023 looks to be different. At the end of the first semester, the payment of interest on the debt was 166,000 million pesos greater than the infrastructure spending. 

In addition to the fact that the payment of the debt has increased due to the increases in the interest rates of the Bank of Mexico, there are other mandatory expenses that increasingly absorb part of the budget; for example, life pensions and social programs, and transfers to the states through participations and contributions. 

In addition to other actions, such as financial and fiscal support for Pemex. Everything, in a context of lower income to the public treasury due to the appreciation of the peso, since it costs less than the price of export oil and less VAT is collected for foreign trade operations, according to Yorio.  

Another challenge for the new administration is to create more revenue, that is, to carry out a comprehensive tax reform. 

“Ideally, it would have been good for this six-year term to be done, but they didn’t. For the next one, there must be a reform, if not, there will not be enough money for projects and programs, and everything that the next government wants to do”, Gonzali considers. 

If the Treasury is losing income due to the super peso, it is important to note that it also benefits and compensates the national economy because growth in exports, remittances and tourism are expected, highlights the chief economist of the Treasury, Rodrigo Mariscal. 

One more challenge is Pemex because it is still heavily indebted and it does not seem that the situation is going to change anytime soon, adds the economist from Franklin Templenton. 

“I believe that the next administration is no longer going to continue with the focus of fixing the problems that arise with Pemex, it is going to have to provide a comprehensive solution to the issue,” says Casillas. 

Last July, Fitch Ratings and Moody’s made downward adjustments to Pemex’s credit ratings and outlook. Fitch justifies its downgrade on concerns about the government’s ability and willingness to improve the company’s liquidity position. Moody’s believes that the government will continue to finance the oil company’s cash needs, in addition to helping it with the payment of its debt amortizations in 2023, 2024 and 2025. 

An analysis of México Evalúa refers that, in what Since the current administration, the government has transferred 772,000 million pesos to Pemex to help it financially. Meanwhile, the Treasury reports that the supports, granted in 2019 and 2021, add up to 10,000 million dollars, while the Shared Utility Right (DUC) was reduced from 65% to 40% to the oil company.  

“Unfortunately, inflation will continue at high levels, it will not be until the end of 2024 that it can reach a level of 3.5%, which is still outside the goal of the Bank of Mexico, but that is not the task of the new government, here the challenge is to respect the autonomy of the central bank”, says Gabriela Siller, director of Economic Analysis at Grupo Financiero Base. 

Gonzali believes that the current government’s decision to maintain gasoline subsidies helped control the increases in crude oil prices in recent years, and that this measure can be activated in the next administration, when oil prices spike.  

Siller anticipates greater volatility for the exchange rate next year because there will be elections in Mexico and the United States. 

For her part, Yorio refers that the government does not have mechanisms to influence this, since it is determined by supply and demand in the markets. 

“What there has to be is a positive message, a message of conciliation with the private sector and in favor of the free market so that the exchange rate does not react so strongly; In other words, there should be no surprises like in 2018, when the construction of the new airport in Mexico City was cancelled”, warns the economist from Grupo Financiero Base. 

And to cover all the branches, Casillas adds another two: “That the energy sector works with market logic”, and the pending of several six-year terms, which is “to improve the rule of law; If we do not fix both issues, we will not see the potential for economic growth that Mexico has as sustainable”. 

Source: Expansion