Background on Mexico’s Fiscal Situation
For years, Mexico’s fiscal framework has compensated for its institutional weaknesses. However, according to Renzo Merino, the sovereign analyst for Mexico at Moody’s, this balance has started to weaken significantly in 2024.
Government’s Fiscal Plans
In late 2023, the Mexican government proposed a fiscal deficit of 5.9% of GDP for the 2024 fiscal year, the highest in two decades. The outgoing administration aimed for a fiscal consolidation leading to a 3.9% deficit by 2025, but Moody’s estimates it will likely end at 4.3% of GDP and struggle to reach 3% before 2028.
Institutional Weakness and Corruption
Merino highlighted that Mexico’s institutional weakness, characterized by corruption control and respect for the law, has historically been offset by its fiscal strength. However, this balance shifted in 2024.
- Institutional Weakness: Merino pointed out that Mexico lagged behind other countries with similar sovereign ratings due to its institutional weaknesses, including corruption control and respect for the law.
- Fiscal Strength: Historically, Mexico maintained moderate fiscal deficits even during crises, which compensated for its institutional weaknesses.
Monetary Factors and Banco de México
Merino also noted that Mexico’s monetary factors, particularly the independence of Banco de México, have been a distinguishing feature. The central bank’s independence provides confidence that it will respond to inflationary shocks and maintain financial stability.
High Interest Payments on Debt
Moody’s warned that Mexico, along with India and Panama, pays a higher percentage of its income in debt interest compared to other countries with similar ratings.
- Average Interest Payments: Countries with “Baa” ratings, including Mexico’s peers like Uruguay, Hungary, Mauritius, Paraguay, the Philippines, Indonesia, Romania, Peru, Thailand, Panama, and India, pay an average of 9% of their income in debt interest.
- Mexico’s High Interest Payments: Mexico pays nearly 17% of its income in debt interest, almost double the average among its peers.
Arianne Ortiz Bollin, Moody’s director of sovereign analytics for Latin America, clarified that the cost of financing is determined by market conditions and does not necessarily reflect a country’s sovereign rating in Moody’s or other agencies.
