The higher spending and budget deficit proposed by the Mexican government for 2024 would put pressure on monetary policy and the inflation rate in the country, Bank of America Securities (BofA) estimated this Tuesday.
On August 8, the Mexican government sent Congress its 2024 economic package, projecting a budget deficit of 5.4% of gross domestic product (GDP), the largest in more than 20 years, and higher spending of 1.2 percentage points of GDP.
In an analysis, BofA noted that a larger fiscal deficit puts upward pressure on the Bank of Mexico (Banxico) interest rate because it means more issuance than previously expected, which would “put the possibility back on the table.” Rating downgrades.”
With that in mind, he assumed that higher spending would provide more stimulus to an already overheated economy, further fueling inflation and prompting Mexico’s central bank to maintain its high target interest rate for a longer period of time.
We put Banxico on hold with the first cut in June 2024, but broadly speaking this budget puts more upward pressure on inflation and on Banxico.
For Bank of America, the main reason for the deterioration in the fiscal situation will be the proposed increase in spending by 1.2 percentage points of GDP compared to 2023, as the Ministry of Finance and Public Credit (SHCP) predicts an increase in spending on economic support of the population by up to an estimated 26.2%.
Meanwhile, he highlighted that the Mexican government forecasts a decline in income from 21.7% to 21.3% of GDP in 2024.
“A slowdown in GDP is a downside risk to income. And we see upside risks to spending: higher longer-term interest rates, greater support for Pemex and potentially a close federal election,” he added.
In addition, an analysis by Banorte Bank shows that the growth estimate for Mexico’s GDP in 2023 and 2024 is consistent with its previous estimates in a range between 2.5% and 3.5%.
“It is noted that this is due to the dynamics of domestic sectors, with some more obvious results of ‘nearshoring (supply chain relocation)’,” he added in his commentary.
For his part, he pointed out that the reduction of the Shared Profit Right (DUC) from 40% to 35% would reduce the financial costs of the state-owned Petróleos Mexicanos (Pemex) and mean a net balance of zero for the company.
He noted that the Treasury has said this will allow it to cover just over 80% of its planned 2024 debt maturities.
The Mexican Congress has until the end of October to approve the revenue part of the economic package, while it has until November 15 to approve the Mexican government’s public budget in 2024.