Mexico's economic-political cycle running its usual course

Over the next two years, Mexico will experience the traditional political-electoral cycle of the last six administrations, during which the economy will expand and contract in response to the transition to a new government, Moody's Analytics wrote in a note.

“This means that the economy will benefit in 2024 and be affected in 2025 … In particular, the economy suffers the effects of the change of administration every six years, but also enjoys the benefits of expansive spending during the electoral process,” the note said.

According to Moody's, the political cycle of the economy involved two clear phases during the last four decades.

“The first is an expansive phase, which occurs during the first six months of the last year of government. In this phase, fiscal policy is used not only to finance the electoral process and complete the infrastructure works of the government in power, but also to stimulate the economy and generate a feeling of social wellbeing with the intention of winning the preferences of voters toward the party in power,” it said.

The second phase includes contraction, starting with the withdrawal of the fiscal stimulus after the elections and extends until the first half of the first year of the new government, because at the beginning of each new administration there is a delay in the exercise of the federal budget.

“This delay in spending, together with the uncertainty generated around the new economic and political team, introduces a delay in consumption and private investment decisions, which is reflected in a slowdown in economic activity,” Moody’s said.

So far, nothing that could interrupt this cycle is on the horizon, according to Moody’s, so economic growth should continue to be determined by politics in the next two years in Mexico.

Next year will be the last year of the six-year term of the Andrés Manuel López Obrador administration, as presidential and congressional elections are planned for June, as well as some at state and municipal levels.

Electoral budget

In another note, investment bank UBS wrote that Mexico's draft budget for next year presents a significant increase in public spending and the largest fiscal deficit in more than two decades.

In the opinion of UBS, “the project reflects the political reality of an election year.” Public spending will increase from 25% of GDP in 2023 to 26.2% in 2024, and most of the increase is due to higher subsidies, as well as social programs, which will increase from 2.4% to 2.7% of GDP, and contributory pensions, which will rise from 4.2% to 4.4% of GDP.

“This means that the incoming administration will likely face fiscal challenges, including the need for tax reform and a long-term solution to the fiscal obstacle that [federal oil firm] Pemex presents,” the UBS note said.

Moody’s wrote that in 2024, “the electoral process will produce both an expansion of public spending to finance the elections as well as an increase in private spending generated by the creation of temporary employment, accompanied by a greater demand for services related to the campaigns and by private contributions.”

Additionally, the government would accelerate public investment to complete infrastructure works before the end of the six-year term, according to Moody’s. “The economy will experience a rebound during the first half of 2024. However, this stimulus in spending will fade once the elections have passed, but also due to the typical closure of the federal budget at the end of the government period.”

“The contraction effect at the end of the six-year term will extend towards the beginning of the new administration given the delay in the execution of the budget that results from the change of the economic and political team. This will induce an extension of the economic slowdown throughout the first half of the first year of the new government, which on this occasion will run from the fourth quarter of 2024 to the first quarter of 2025,” it added.

According to Moody's, the magnitude of the slowdown in the beginning of 2025 will depend on the degree of certainty around the new government's economic program and the confidence the new economic team inspires.

The note concluded that economic growth in 2025 could be lower than in 2024, similar to what happened during the last six government terms. However, given that in this new political cycle, the new government will take office in October instead of December, the slowdown in 2025 may not be as pronounced.

Post-pandemic adjustment

Although James Salazar, deputy director of economic analysis at CI Banco, recognizes that the 2024 electoral dynamics influence the economic cycle due to higher anticipated public spending, he also told BNamericas that “in general terms, what is expected is that growth rates will moderate little by little after these rebounds that we saw due to the strong fall registered during the pandemic.”

“The economy has been growing at rates above the average in the last decade and the reason is that it was just recovering from the strong blow that was COVID-19,” Salazar said.

For this reason, a moderation in the growth rates is expected, but that does not necessarily imply that 2025 will be worse than 2024. “This year, [the economy] will perhaps grow above 3%, which is growth that has not necessarily been seen on other occasions because there is still a rebound effect due to the pandemic, but that will moderate in the coming years,” he added.

By 2025, Salazar expects growth rates of 2-2.2%, “closer to the level to which we were accustomed. It is in that sense that moderations are expected, not because it necessarily has to do with a worse or better year.”

According to the general economic policy criteria published by the finance ministry in its 2024 budget bill, GDP will expand 2.5-3.5% next year and slow in 2025 to 2-3%.

For its part, the IMF revised its growth projection for the Mexican economy this year to 3.2% from 2.6%, before slowing to 2.1% in 2024, according to a report published after representatives visited the country.