Mexican economy

Mexico City. Mexico can maintain its investment grade in the next two years, but if the debt reaches 60 percent of the Gross Domestic Product (GDP) it can lose it, BBVA predicted.

“Public debt could approach 60 percent of GDP at the end of 2030 and the investment grade would most likely be lost if there was no fiscal discipline,” commented Carlos Serrano Herrera, chief economist at BBVA Mexico.

“If medium-term fiscal consolidation is not achieved in which Mexico has lower deficit levels, close to 2 percent, we think that by the end of the administration the debt could be reaching levels close to 60 percent of GDP and There is a significant risk that the investment grade could be lost,” he added in the presentation of the Mexico Situation report prepared by BBVA’s Economic Studies area.

The financial institution predicts that the public debt in 2024 will be 50.8 percent of GDP and the public deficit will be 5.0 percent of GDP, which is the highest level in the last 35 years.

“We believe that the macro (macroeconomic) fundamentals that remain in the fiscal sector until now help support the prospects that Mexico can maintain the investment grade in the short term, during the next two years,” commented Iván Fernández Mendiola, economist BBVA Mexico senior at the event.

He stressed that it is important to review the Mexican fiscal framework to increase collection, and that the most efficient way to do so is to reduce informality and continue fighting evasion, as well as change Pemex’s business model so that it represents less pressure on the public finances in such a way that lower deficits can be achieved.

“Because otherwise, we do believe that in the coming years there is an investment grade risk,” he reiterated.

Recession risks

BBVA analysts maintained that they cannot rule out a recession. They explained that if the judicial reform generates uncertainty among investors because it will not be known for a year how it works and who the judges are, it would generate a negative shock to investment.

Furthermore, if the government decides to lower spending to reduce the deficit from 5.9 to 3.0 percent, it will have a negative impact on growth, in addition to a possible slowdown in the United States. “All this could result in a recession in Mexico,” Serrano asserted.

He highlighted that the Mexican economy will slow down significantly because there is less public and private investment in the flagship infrastructure projects that were carried out in the last six-year term and that are about to conclude.

In turn, the lower growth is foreseeable due to the slowdown in the manufacturing sector in Mexico, as a consequence of the fact that this market is also expanding at a slower rate in the United States.

The analyst reported that the financial institution revised downward the outlook for Gross Domestic Product (GDP) growth to 1.2 percent in 2024 and 1.0 percent in 2025.

At the beginning of the year, BBVA’s expectation was 2.5 percent in 2024 and 2.4 percent in 2025.

Greater drop in rates

Fernández Mendiola highlighted that weaker economic activity drives a better inflation outlook and that the Bank of Mexico has room to cut interest rates.

BBVA expects that in the fourth quarter of 2024 inflation will close at 4.8 percent and by 2025 there will be a sustained return towards the Bank of Mexico’s target range.

Fernández explained that the monetary policy of the Mexican central bank is one of the most restrictive in the world and that many members of the Governing Board of the Bank of Mexico are willing to promote a cycle of lower interest rates.

He even detailed that two cuts of 25 basis points are expected in November and December, and that in the third and fourth quarters of 2025, the central bank will lower the reference interest rate by 50 basis points to bring it to 7.50 percent.

Tulum, QR. Fitch Ratings said Thursday that it is not considering reducing Mexico’s sovereign debt rating or moving it from its current investment grade rating – a risk-free instrument for investors – said Gerardo Carrillo, Fitch’s regional director for Latin America for international public finance, when speaking about the country’s outlook a few days before the change of government and after a reform to the Judicial Branch was approved.

Before the end of the year, the rating agency will consider a review of the rating outlook, which is currently “stable,” said the executive, without anticipating the direction of the change they would make.

“The rating outlook is stable. Before a direct downgrade in the rating, what could happen is a positive or negative change in the outlook, but with the current stable outlook we are not seeing a potential downgrade of Mexico’s credit rating,” said the executive while participating in the 18th National Convention of the Association of Multiple Purpose Financial Companies of Mexico (Asofom).

He added that “it is likely that the reforms (of the so-called Plan C) will significantly affect Mexico’s institutional profile, particularly the reform of the judiciary, but it is too early to assess the magnitude of the impact.”

“The reform that is most worrying and that is making the most noise is that of the judiciary. We clearly see that this will have a negative impact on the institutional profile of the country, especially on the vulnerability and autonomy of the judiciary, but it is too early to know the impact,” he insisted.

According to the rating agency, the “potential” risk of the set of reforms that were presented by the executive last February is “undermining the investment and business climate, by affecting the already weak rule of law.”

Sheinbaum inherits a stable economy

Carrillo said that the new administration, which will be headed by Claudia Sheinbaum, will inherit a “stable economy. We assume that a prudent monetary and fiscal policy will be maintained to contain macroeconomic imbalances and that the economy of the Bank of Mexico (BdeM) will continue to be respected.”

However, he said, despite the strength of macroeconomic institutions, weak growth has been a challenge and a constraint on the sovereign rating. Average growth between 2000 and 2023 has been 1.7 percent, while in comparable countries it is 3.6 percent.

“We do not expect a marked improvement in economic activity in the coming years, unless there are economic reforms, such as tax, labor or social security reforms, which would substantially improve productivity,” he added.

Mexico City. Private consumption in the first eight months of the year grew 9.1 percent compared to the same period in 2023, a figure that, while positive, also showed weakness compared to the figure recorded in the same period, according to an analysis by BBVA Research.

According to the BBVA Research Big Data Consumption Indicator, household spending in Mexico increased by 2.1 percent in August compared to July.

However, between January and the eighth month of 2024, the measurement showed a growth of 9.1 percent, a figure that was 2.3 percentage points lower than the same period of the previous year, a figure that according to analysts shows a sluggishness or weakness.

“We expect that the slowdown in real wages, given the lower job creation in the industrial sector, will prolong the sluggishness of private spending this year,” they said.

They noted that according to IMSS figures, the number of workers affiliated with this institution reported an average year-on-year variation of 8.0 percent in the first eight months of 2024, a figure that translated into a decrease of 1.7 percentage points compared to that recorded in the same period of the previous year.

“We expect the sluggishness of private consumption to continue for the rest of the year, in an environment of low growth in formal employment,” the analysts said.

They considered that the slowdown in domestic demand in the second half of 2024 will define a low starting point for economic activity growth in 2025, which faces a gloomy outlook for domestic demand, in particular, with respect to gross fixed investment.

The measurement indicates that in the first eight months of the year, consumption of goods grew 8.8 percent at an annual rate, a result that was 1.7 percentage points below the figure recorded in the same period of 2023.

Spending on services grew by 11.2 percent between January and August, 3.8 percentage points higher than the figure recorded last year.

In terms of the services component, BBVA Research highlighted that the segments linked to tourism recovered the level observed until June. Restaurant consumption grew 3.9 percent monthly, after a lower dynamism observed in July, while spending in hotels grew 2.6 percent in August compared to the seventh month in the same period.

“Even considering the August data, the average interannual growth rate of both segments, for the first eight months of the year, remains below that recorded in the same period of the previous year,” since consumption in restaurants observed an average variation of 11.0 percent annually, while spending in hotels showed a contraction of 4.6 percent in the same period.

By type of establishment, the measurement indicates that in August spending in online stores grew 0.5 percent monthly, while purchases in physical stores showed a monthly variation of 2.1 percent during the same period.

However, he noted that online store consumption showed an annual rate variation of 23.8 percent in the first eight months of the year, 15.4 percentage points above the figure recorded in the same period in 2023.

Consumption in physical stores grew 8.3 percent in January-August compared to the same period last year, a figure that was 3.8 percentage points higher than that observed in the same period last year.