Growth momentum expected to ease somewhat
Growth momentum should lose some steam in 2024. Growth will be damped by the gradual softening of US activity, which will affect the manufacturing industry (and its exports) and by durably tight credit conditions. The central bank started to cut policy rates in March 2024, but a restrictive monetary stance is likely to prevail throughout the year. Furthermore, household consumption (70% of GDP) will continue to register an acceptable growth rate, thanks to the rigidity of the local labour market and income support measures such as increasing the minimum wage to above inflation (20% in 2024). Importantly, possible weakening of the US labour market may tend to reduce remittances to Mexico, thus exerting negative pressure on domestic consumption, depreciation of the Mexican peso against the dollar throughout the year would help soften the negative impact. Regarding gross fixed investment (25% of GDP), while the country will likely continue bearing the fruit of tailwinds related to the nearshoring trend and to the US 2022 Inflation Reduction Act thanks to its USMCA membership, the pace of private investment growth may lose steam, as investors could delay some projects until after the elections in Mexico and the US in June and November 2024, respectively. However, public spending (11%) will accelerate as indicated by the 2024 budget, with higher transfers to households.
Sound external accounts and temporary fiscal slippage
The minor current account deficit should widen slightly in 2024. The trade deficit (-0.3% of GDP in 2023) is likely to increase this year due to a slower deceleration in domestic activity compared to the US (the destination of roughly 80% of Mexican exports). In addition, the secondary income surplus (3.4% of GDP) should slightly decline, underpinned by weaker remittances on back of a softer US job market. Similarly, the services account deficit (1% of GDP) should also increase driven by relatively weaker travel surplus amid fewer US visitors. By contrast, the primary income deficit could narrow (2.4% of GDP), notably due to lower dividend repatriations by foreign investors. On the financing side, foreign direct investment (3.1% of GDP) will continue to comfortably cover the external account shortfall. In addition, external debt (excluding FDI-related debt) stood at 31.4% of GDP in December 2023 (17% of GDP for the public-sector portion). All told, Mexico should keep its solid external position which is supported by foreign currency reserves of USD 213 billion (covering roughly 4 months of imports) and a preventive USD 35 billion Flexible Credit Line with the IMF (renewed for two years in November 2023).
On the fiscal front, the government is expected to temporarily deviate this year from its long record of prudent fiscal policy. The revised 2024 budget estimates the nominal fiscal deficit at 5% of GDP. The deterioration would notably be explained by higher expenditure, including higher social spending and interest payments. In addition, revenues should slightly weaken on back of lower oil related revenues (a further reduction in state-owned oil company Pemex’s profit-sharing from 40% to 30% was approved by lawmakers). In addition, the budget also indicates a new capitalisation of the oil company of roughly 0.4% of GDP. Importantly, while the government expects the fiscal shortfall to shrink to 2.5% of GDP in 2025 (due to lower spending), fiscal consolidation will be carried out by the new government.
Mexicans go to the polls in June 2024
Currently serving his last year in office, leftist President Andrés Manuel López Obrador unveiled a package of constitutional reform proposals to Congress in February 2024. It included several measures, such as reforming the pension system (which would have a fiscal impact in the medium term), revising the process for appointing judges, electoral law, and environmental regulations, among others. Although most of these proposals are unlikely to pass in the legislature (the ruling Morena party lacks the two-thirds majority in both houses of Congress needed to push through changes to the Constitution), fierce opposition by the opposition would likely prove politically costly as the 2 June, 2024, general elections loom. Indeed, in Mexico, presidents are not eligible for re-election. However, Obrador's high popularity (owing to stronger social policies and investments in poor regions) tends to benefit Morena in the race. According to a March 2024 poll, Morena´s presidential candidate, former Mexico City Mayor Claudia Sheinbaum, holds a wide lead over the second favorite, former Senator Xóchitl Gálvez of a three-party opposition coalition (58% vs. 34%, excluding the 17% undecided voters). A Sheinbaum victory would represent policy continuity, with fiscal consolidation expected to be resumed and social programmes to be broadly maintained. In addition, the troubled state-owned oil company PEMEX is expected to continue relying on sovereign support. Worth noting is that the front-running candidate vowed to keep expanding the state-owned energy companies (PEMEX and CFE) activities, while also accelerating the transition to renewable energies. Sheinbaum seems open to private participation in the sector, although the public sector would likely maintain its market share of over 50%. She also stated that PEMEX could participate in the exploration of lithium. Importantly, in addition to the single-round presidential vote, the Lower House (500 seats) and the Senate (128 seats) will also be fully renewed. In March 2024, polls indicated that the Morena party and its allies would fall short of reaching a Legislative supermajority, thereby reducing the possibility of passing reforms that could undermine economic and political institutions. Meanwhile, the prospect of US elections in November could briefly spark uncertainty. Nonetheless, even if Donald Trump were to return to the Oval Office, it is unlikely to prove disruptive to Mexico (in terms of trade relations and the nearshoring trend). First, it is important to bear in mind that it was during the Trump administration that the USMCA trade agreement (set for its first six-year review in 2026) was reached (replacing the old NAFTA). Furthermore, the US prefers to restrict China's influence in the Western Hemisphere rather than block trade with Mexico. Although Donald Trump floated the idea of a 10% blanket tariff on all US imports, Mexico would likely be exempted under the USMCA.