Mexico City — Credit rating agencies have often praised Mexican President Andrés Manuel López Obrador’s (AMLO) fiscal discipline; however, as 2024 draws nearer, the country’s projected fiscal balance is showing signs of deterioration.
Yet Mexico seems poised to dodge a credit rating downgrade in 2024, despite the government’s plan to increase spending in the final year of López Obrador’s six-year term. That roadmap would bring about an unprecedented fiscal deficit and higher borrowing costs, according to analysts.
Mexico’s sovereign debt is regularly assessed by eight agencies: Moody’s, S&P Global, Fitch Ratings, HR Ratings, JCR, DBRS, KBRA, and R&I, all of which, as of September 13, 2023, maintained a stable outlook for the country’s credit rating, supporting an investment-grade status.
These agencies reaffirmed their view after considering that AMLO’s government has pursued prudent public finance policies and fiscal discipline, contributing to the stability of public debt as a percentage of Gross Domestic Product (GDP).
Spending Not Seen in 24 Years
The projected fiscal balance for 2024 shows significant signs of deterioration compared to the trajectory seen in the first four years of the AMLO administration. The Ministry of Finance estimates that the Financial Requirements of the Public Sector (RFSP), the broadest measure of the fiscal deficit, will amount to MXN$1.8 trillion in 2024, equivalent to 5.4% of GDP. Such a deficit has not been seen in at least 24 years.
In 2024, a higher deficit will be incurred because spending is expected to exceed revenues. A budget of MXN$9 trillion is projected, but budgetary revenues are estimated at MXN$7.3 trillion. While a 7.8% real increase in spending is expected compared to the end of 2023, revenues are projected to rise by only 0.8% in real terms.
Is a Sovereign Credit Rating Downgrade for Mexico on the Cards?
Although the fiscal deficit is set to increase at the end of the term, the Historical Balance of Public Sector Financial Requirements (SHRFSP), the broadest debt measure, will maintain a stable trajectory with a public debt-to-GDP ratio below 50%, according to the General Economic Policy Criteria for 2024.
Since 2021, the SHRFSP has shown a declining trend, decreasing from 50.2% of GDP in 2020 to 46.5% of GDP at the end of 2023 and reaching 48.8% of GDP in 2024, in line with the stability sought by the government in this key variable for credit rating agencies.
The Economic and Budgetary Research Center (CIEP) noted that the decrease in the debt indicator in 2024 is “artificial” and is due to recent methodological changes in GDP calculations by INEGI that have made the economy appear larger, rather than a “real” reduction in the balance.
To reach the 48.8% debt level, it added, certain assumptions must be met that do not align with long-term projections related to demographic transition, a strong peso against the dollar, and interest rates dropping to half of their current levels.
What Would Pressure Mexico’s Sovereign Rating?
Ricardo Gallegos, Senior Executive Director of Public Finance and Sovereign Debt at HR Ratings, told La Estrategia del Día that sustained fiscal deficits above 4% for two or three consecutive years and a debt/GDP ratio reaching 50% are factors that could exert pressure on the sovereign rating.
“There is still a relatively stable situation in the short and medium term. These are important points (the fiscal deficit), but we need to see how the economy behaves,” he explained.
Vector Analysis estimated in a note that, despite the deficit increase, the country’s credit rating will remain unchanged for at least the next 12 months. Therefore, it will be important to monitor debt levels and economic dynamics in the coming year.
Grupo Financiero Monex noted in a statement that, given the favorable effects of exchange rate appreciation and higher growth for 2023, the implications of the deficit growth in the SHRFSP do not appear to have a “high impact” in the immediate future, as public debt will remain at levels close to 50% of GDP.
It added that if the deterioration in the fiscal profile persists during the next administration, it will be necessary to restore balance to ensure the stability of credit ratings.
Adriana Hortiales, a public finance consultant and former government official, stated that debt will not exceed 50% of GDP, and economic growth will increase. “I don’t believe there will be any actions from rating agencies because the overall picture looks good. We have lower revenues and higher spending, but our debt remains below 50% of GDP.”