Previous Quarterly Editions
Expropriation Risk: 60 60 60 60 ►Political Violence Risk:57 57 57 57 ►Terrorism Risk:65 65 65 63 ►Exchange Transfer and Trade Sanction Risk: 45 54 54 54 ►Sovereign Default Risk:55 55 55 55 ►
TREND ►
Protest intensity to date* 2022 2023 Very High Very High Unrest risk in 2024**Cost of living: MediumAnti-austerity: High
*Note: Protest intensity is calculated based on ACLED. **Risk levels are calculated by WTW. Where data are missing no risk level will be displayed. For details of 'anti-austerity' calculations, see the essays in the introduction; for details of 'cost-of-living' calculations, see the previous edition of the Index.
During the 2024 fiscal year, the Mexican government will follow a markedly expansionary fiscal policy, greatly increasing the public deficit and debt. The government of President Andres Manuel Lopez Obrador (AMLO) will embark on a spending spree during its last year in office, throwing away the policy it cultivated for five years of fiscal conservatism — even during the COVID-19 pandemic, when the government avoided increasing spending substantially, unlike so many other advanced and emerging countries as they sought to cushion the consequences of the economic collapse caused by official responses to the pandemic.
The public sector borrowing requirements increased from 2.3% of Mexico’s GDP to only 3.8%, as the government refused to subsidize businesses to avoid job losses or give money directly to families. GDP plummeted by 8%, and the fiscal restraint partly explains Mexico’s slow recuperation (this year, GDP is expected to regain its pre-pandemic level).
Therefore, the government argues that it has the fiscal space for a substantial spending boost, with the public sector borrowing requirement projected to jump 5.4% of GDP — the highest level since 1988, when the country was emerging from the 1980s debt crisis. Much of the spending will be used to finish a refinery and a train in the Yucatan Peninsula — flagship projects of the AMLO administration. Both projects have seen their costs skyrocket, and further budget overruns are plausible. Public debt is projected to increase to 48.8% of GDP, up from 46.5% in 2023.
The risk of expropriation is mostly concentrated in the energy sector, where AMLO wishes to exert greater state control, arguing it is a matter of national sovereignty. Foreign investors can, however, expect government involvement in other sectors, as the administration becomes more radical in its final year.
The president has shown repeatedly that he is willing to confront private investors and literally pay for the consequences, including any financial penalties and reputational costs. AMLO considers that sovereignty issues (as defined by him) are superior to legal stipulations or even international treaties.
Lithium — a key metal in the production of some forms of power cells — has fallen into that sovereignty classification. In 2022, the government announced that no new concessions to exploit the metal would be conceded to private companies, but it was expected that those already granted would be respected. On September 25, however, China’s Ganfeng Lithium announced that Mexico’s economy ministry had canceled nine concessions it had, including the largest one in the country, arguing that it had not invested enough in recent years.
Arguably, a major failure of AMLO’s administration has been violence: The policy of “hugs, not bullets” has represented in reality a shortcoming by the state in the fight against criminal groups, particularly drug cartels. Such groups practically control territorial enclaves and greatly influence some municipal and state governments. The president himself has shown public sympathy toward the Sinaloa cartel and its imprisoned (in the United States) former leader.
Increased activities by drug cartels and other criminal groups are causing significant Mexico-U.S. tensions. Some U.S. Republican legislators are openly calling for U.S. military action against those cartels in Mexican territory, particularly aiming to arrest the illegal trade of opioid fentanyl coming from Mexico.
The U.S. presidential campaign will probably heighten those tensions further, especially if — as seems likely at the time of writing — the former Republican president, Donald Trump, is once again his party’s nominee for president in the November 2024 U.S. presidential election. When in office (2017 – 2021), Trump was notoriously hard on the politics and security of the U.S.-Mexico border.
Although Mexico has little experience of international terrorism, many drug cartels use terrorist tactics to intimidate local communities and businesses. They have also branched out into other criminal activities, such as the selling of “security” to businesses (protection rackets), which has become a widespread problem even for small and midsize firms, consequently depressing investments further.
While AMLO has shown strong preference for a strong and nominally stable U.S. dollar-peso parity, he has not attempted to alter exchange rate policy (that can be modified by the finance ministry) nor curtail the Bank of Mexico’s (Banxico’s) independence; however, he has tried, and failed, to obtain monies from Banxico for the exchequer, including part of the profits from its operations.
Moreover, AMLO has shown a seemingly cavalier attitude when designating top Banxico officials, apparently seeking a less orthodox monetary policy. Nonetheless, the central bank has continued to maintain a strict monetary stance, including several interest rate increases aiming to arrest inflation. The central bank’s benchmark rate, set at 11.25% since March, greatly explains — combined with an increasing inflow of remittances from the United States (which may include money laundering from drug cartels) — the robust peso against the U.S. dollar. The exchange rate has even dipped below the 17 units per dollar during 2023 — the strongest nominal level since the end of 2015.
AMLO’s sovereignty stances have also added to trade tensions with the United States and Canada. The government’s discriminatory policies against private electricity companies and a ban on imports of genetically modified corn for human consumption may eventually spark trade sanctions against Mexico from its partners in the United States-Mexico-Canada Agreement.
The substantial jump in the fiscal deficit planned for 2024 will naturally also increase public debt significantly. While the debt trajectory cannot be categorized as explosive, budget pressures may increase the debt stock even more than planned and spook the capital markets, which are already wary of the enormous debt owed by state-owned Pemex and its need of significant financial injections in order to avoid a default on its US$110 billion obligations (it is the most indebted oil company in the world). Pemex’s bonds have had a junk credit rating since 2020.
AMLO’s nationalistic obsession with oil and gasoline may thus entail a significant cost during his last year in office. The skyrocketing cost of the Dos Bocas refinery, which is expected to reach at least US$22 billion (the original estimate was US$8 billion) — alongside Pemex’s severe financial problems and the major government fiscal expansion — may push credit rating agencies to downgrade the federal government’s debt during 2024, more so if the presidential campaign and election sparks political uncertainty on the smoothness of the October 1 government changeover (as AMLO has always refused to recognize any defeat when he has lost).
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