Introduction to the Issue
Mexico City’s mayor, Claudia Sheinbaum, downplayed the significant debt incurred during President López Obrador’s final year in office, stating that it was merely a “little debt” to complete projects initiated by his predecessor, including the Dos Bocas refinery, the Mayan Train, and the Tehuantepec Railway. However, this claim is disputed due to the substantial debt accumulation and its negative implications on Mexico’s financial standing.
Fiscal Policy and Debt Accumulation
Contrary to the misconception that López Obrador’s administration implemented a prudent fiscal policy, the reality is that it deteriorated Mexico’s net financial position and proved economically inefficient. The government engaged in increased borrowing, depleted public funds and trusts, notably the Fondo de Estabilización de los Ingresos Presupuestarios, which plummeted from 279,000 million pesos in 2018 to just 9,000 million in 2020.
Growing Debt as a Percentage of GDP
The balance of the Public Sector’s Financial Requirements started at 10.6 billion pesos in 2018 and steadily increased to 17.4 billion pesos in 2024, a six-billion-peso increase over six years. In 2024 alone, 2.5 billion pesos were added, contradicting Sheinbaum’s claim of a “little debt.” As a percentage of GDP, it rose from 44.9% in 2018 to 51.3% in 2024, indicating a substantial new debt burden.
Implications of High Debt Levels
With public debt reaching 51.3% of GDP, Mexico’s financial health is precarious, potentially impacting its debt rating. The government’s insistence on injecting billions into the struggling Pemex and committing to growing resources for social programs, such as pensions for the elderly, could worsen the situation. Losing investment-grade ratings from credit agencies would elevate the financial cost of debt, already consuming 12% of public sector expenditure.
Negative Social Return on Public Investments
Most of López’s public investment projects, except possibly the Tehuantepec Railway, have negative social return on investment when assessed. These projects were constructed without comprehensive assessments of their social profitability, income, and costs. Notable cost overruns include the Dos Bocas refinery (from 211,000 million to 400,000 million pesos), the Mayan Train (from 197,000 million to 544,000 million pesos), and AIFA (from 92,000 million to 139,000 million pesos). These deficit-generating projects will continuously fuel new public debt.
Societal Impact and Future Growth
Allocating over a trillion pesos to these socially unprofitable projects has resulted in diminished overall well-being and reduced national wealth, subsequently lowering future economic growth potential. These three projects have made Mexico poorer.
Additional Considerations
An important detail is that the mentioned public works cost a trillion pesos over four years. Thus, Sheinbaum’s assertion that 2.5 billion pesos of debt in 2024 were for completing these projects is partially false, as many projects remain unfinished, and substantial funds were diverted to the struggling Pemex and various vote-buying programs with negative social returns, such as Jóvenes Construyendo el Futuro and Sembrando Vida.
Future Projections
The government anticipates that the Public Sector’s Financial Requirements will reach 18.8 billion pesos by the end of 2025, a 1.4 billion-peso increase from 2024. This translates to “a little more debt,” further emphasizing the contentious nature of Mexico’s mounting public debt.
Key Questions and Answers
- Q: What did Sheinbaum claim about the debt incurred during López Obrador’s final year? A: She claimed it was a “little debt” to complete projects initiated by his predecessor.
- Q: How has López Obrador’s fiscal policy affected Mexico’s financial standing? A: It has deteriorated Mexico’s net financial position and proved economically inefficient, leading to increased borrowing and depletion of public funds.
- Q: What is the current debt-to-GDP ratio in Mexico? A: The public debt has reached 51.3% of GDP, raising concerns about Mexico’s financial health and debt rating.
- Q: How have López’s public investment projects performed? A: Most projects have negative social returns on investment, constructed without comprehensive assessments of their profitability and costs.
- Q: What are the potential consequences of high debt levels and negative social returns on investments? A: These factors could lead to a lower debt rating, increased financial costs, and diminished future economic growth.
