Mexico is currently traversing turbulent economic waters, with recent developments causing significant concern among analysts and government officials alike. On Friday, President Claudia Sheinbaum publicly expressed her frustration when the ratings agency Moody's downgraded the Mexican government's debt outlook to "negative." Moody's explained its decision, citing the introduction of new laws threatening the integrity of the judiciary and the existing system of checks and balances.
Despite maintaining Mexico's overall credit rating at Baa2, Moody's underscored the risks posed by the growing government debt. The agency's report hinted at potential future financial burdens, particularly indicating the government might need to shore up the state-owned oil company, Pemex, which is already dealing with heavy debts.
Sheinbaum has been vocal about her belief concerning foreign ratings agencies, claiming they often operate with what she terms "bias of origin" against the economic strategies deployed by her party. This approach initially formed during the presidential term of her political mentor, Andrés Manuel López Obrador, who took the reins on December 1, 2018. Sheinbaum remarked, "Many times, these ratings agencies are aimed at issuing evaluations starting from an economic model. Starting in 2018, the economic model in our country changed. Many times, these ratings have this bias of origin."
Under López Obrador, the government engaged in extensive fiscal strategies, directing substantial funds to Pemex, undertaking vast infrastructure projects, and executing cash assistance programs. These measures contributed to alarming federal budget deficits, estimated at about 6% of Mexico's gross domestic product (GDP) for the year 2024. Experts project these deficits will persist, albeit on somewhat lower levels, over the next couple of years.
Sheinbaum continued her predecessor's initiative to reform the judiciary significantly. Notably, the proposed changes would require all federal judges to run for election during the years 2025 and 2026. Critics, including voices from the United States, argue this could undermine judicial independence and make judges susceptible to political coercion. Boardroom and legal circles worry, too, about the risk of drug cartels potentially financing judicial campaigns to manipulate the court system.
Moody's report described the current fiscal climate, stating, "Deterioration of debt affordability and greater inflexibility in government spending hinder fiscal consolidation, which has largely worsened this year due to widening deficits." Such developments mark a departure from Mexico's previously established pattern of maintaining low deficits, independent of prevailing economic pressures.
The agency also highlighted how the constitutional overhaul could severely undermine the judiciary's checks and balances, potentially leading to adverse effects on Mexico's fiscal health and economic standing. Moody's assessment clearly articulated concerns over how these changes could alter the business operating environment within Mexico significantly.
The fallout from these decisions has already begun manifesting, with the Mexican peso witnessing depreciation. The currency has fluctuated recently, dropping to approximately 20.50 pesos against the US dollar, reflecting investor apprehension over the government's fiscal course.
Sheinbaum's administration is simultaneously facing pressure to manage the sizeable budgetary deficits. Though she ruled out introducing new taxes next year, her government plans to pivot toward enhancing tax collection from existing avenues. The proposed federal budget for 2025, which was recently submitted to Congress. indicates continued reliance on smoothing out existing debts. Current projections suggest outstanding federal debts could hover around 51.4% of GDP by the end of 2025, though this figure excludes certain debts linked to the oil company and pension plans.
Adding to the economic uncertainty, Sheinbaum's administration anticipates modest growth of between 2% to 3% for 2025. Many experts point out this outlook appears overly optimistic, particularly considering the country’s GDP grew merely 1.5% during the third quarter of 2024.
International relations also play a significant role in shaping Mexico’s economic outlook, especially with the potential resurgence of Donald Trump on the U.S. political scene. Historically, his election has raised concerns over possible changes to trade agreements and border policies. Moody's emphasized investments made by companies interested in "nearshoring," which involves relocating production closer to the U.S. market. Still, factors like potential renegotiations of the United States-Mexico-Canada Agreement (USMCA) set for 2026 could introduce additional risks to Mexico's investment climate.
Moody's pointed out these dynamics, cautioning, "Lower economic growth and, as a result, diminished government revenue would undermine any fiscal consolidation efforts." Such warnings encapsulate the pressure surrounding Sheinbaum's administration as they navigate the complex financial fabric of their nation.
Overall, the interconnected crises of judicial reform, economic challenges, and international pressures present President Sheinbaum’s government with formidable obstacles. Whether she can effectively address these issues and bolster Mexico's standing both domestically and internationally remains to be seen.
