Mexico budget proposal trims 2025 deficit, sees better growth

4 hours ago

2 minutes read

2024.11.15 19:00

By Anthony Esposito and Ana Isabel Martinez

MEXICO CITY (Reuters) – Mexico expects its budget deficit next year to come down to 3.9% of GDP as growth increases, Finance Minister Rogelio Ramirez de la O said on Friday, as the government plans hefty spending cuts including to defense and security.

Latin America’s second-largest economy is seen expanding between 2% and 3% next year, speeding up from the projected 1.5% to 2.5% growth in 2024, according to the proposed budget.

That is significantly higher than the IMF forecast, which sees 2025 growth at 1.3%.

The government has been under pressure to narrow the deficit which is expected to close the year at 5.9% of GDP, the highest since the 1980s, while also fulfilling promises to increase welfare programs.

The finance ministry said growth was backed by a strong labor market, robust private consumption and high levels of public and private investment.

But some analysts said the forecasts appeared overly optimistic.

“The rosy estimates make it unlikely that the deficit and debt forecasts are reached,” said Gabriela Siller, an analyst at Banco BASE.

Siller highlighted the risk to investment in Mexico posed by the re-election in the U.S. of former President Donald Trump, who has called for tariff increases on Mexican goods, as well as constitutional reforms to Mexico’s judiciary that have spooked investors.

Ramirez de la O stressed that spending would look for growth while prioritizing social programs to reduce inequality.

The budget proposal will now be debated by lawmakers in Congress, where President Claudia Sheinbaum’s party and its allies hold strong majorities in both chambers.

The exchange rate for Mexico’s currency is seen at 18.7 pesos to the U.S. dollar by the end of 2025, significantly stronger than current levels around 20 pesos.

The budget assumes an average oil export price of $57.80 per barrel next year. The key oil price is used to estimate a large amount of government revenue.

Proposed spending cuts show the Mexican government deprioritizing sectors such as defense, with a 44% cut compared to the last budget, and security which saw a 36% cut.

Environmental spending was also down 39% despite expectations that Sheinbaum, a scientist who has worked on climate change, would put greater emphasis on the environment.

Spending for state oil company Pemex is shown down 7.5%. The government also expects to transfer 136 billion pesos ($6.69 billion) to Pemex next year to help the heavily indebted firm meet its debt and loan repayments.

“In general terms the budget proposal meets expectations: it shows a considerable reduction in the deficit without fueling concern of a potential economic recession,” analysts at CIBanco wrote in a note.

The economic outlook is optimistic, the analysts added, which “should be enough to remove one more fear from investors.”