Mexico's next president to face challenges amid fiscal weakness – Moody's

Mexico's upcoming government, set to be elected in two weeks' time and take office on October 1, will inherit a challenging fiscal landscape, according to Moody's Ratings.   

The public deficit is forecast to exceed 5% of GDP this year, which will pose significant hurdles for the government in addressing the energy and social challenges facing the country. 

The June 2 elections will be the largest in the country's history. Voters will elect the next president and renew the 128 senators and 500 lawmakers in congress, while eight governors and the head of the Mexico City government also be chosen, in addition to more than 19,000 state and municipal positions.

This will likely be "the first time that Mexico elects a woman to occupy the presidency, whether it is the favorite Claudia Sheinbaum, of the ruling Morena party and its allies, or Xóchitl Gálvez, who heads a coalition formed by the opposition parties PRI, PAN and PRD,” the agency said in a report.

Jorge Álvarez Máynez, representing the Movimiento Ciudadano group, is also on the ballot, but has a very slim chance as he remains well behind the two frontrunners in the polls.

Moody's believes that Mexico will basically decide between continuity or change, although it underscores that whoever wins will have to address challenges such as the need to have support from state oil company Pemex, greater investments for the energy transition, and to meet promises of greater social spending despite deterioration in public finances and declining political capital.

“Sheinbaum's main policy proposals imply broad continuity with the current administration, while Gálvez's would have a more market-based approach to addressing Mexico's economic problems,” the ratings agency said.

“The next government is likely to have less political capital than the current President [Andrés Manuel López Obrador], which will complicate the ability of either candidate to fulfill their campaign promises,” it added.

In Moody's view, the new government's tricky financial environment includes costlier sovereign debt and a fiscal deficit that will likely exceed 5% of GDP in 2024. 

“The task of bringing the fiscal deficit down to levels of historical figures [an average of 2.8% of GDP in 2019-23] and, at the same time, implementing new policy proposals will be difficult for the next government,” it stated.

Although the agency hopes that the next government will continue supporting Pemex, it considers that the oil company's current business strategy has increased its credit risks.

“Sheinbaum and Gálvez agree on the importance of the transition to renewable energy, but Sheinbaum will likely continue to expand the refining business, which will produce greater losses,” Moody's predicted. “Gálvez proposes allowing the participation of the private sector to move Pemex away from unprofitable operations in favor of modern and sustainable energy technologies.”

After years of low investment, the agency warned that Mexico is falling behind in its plans to transition to clean energy and emphasized that transmission capacity is not sufficient to meet growing demand.

“Sheinbaum's proposals suggest continuing the dominance of the state company Compañía Federal de Electricidad over the Mexican electricity sector, but there are no specific plans to expand energy supply in the country. On the contrary, Gálvez would reopen the sector and reactivate electricity auctions in the long term,” it said.

On the positive side, the agency highlighted that real wage growth and low unemployment will support the strong risk appetite for retail loans in the country, while investments in nearshoring could increase business volumes, so its outlook for the Mexican banking sector is optimistic.

“We project that [Sheinbaum] will largely maintain the existing business model of state oil company Pemex and emphasize energy sovereignty, although she has declared the need for an energy transition strategy," Moody's said.

“Gálvez's main policy proposals include a shift towards a more market-based approach to Mexico's economic problems, as well as the need to address security, energy and water issues that hinder nearshoring investment,” the rating agency added.

“Her fiscal strategy is based on addressing Pemex's financial and operational problems in order to free up resources for the federal government.”

Moody's said it also hoped that the new president will continue respecting the independence of the central bank and would have to prepare for a review of the T-MEC agreement with the United States and Canada in 2026, where trade policy with the United States will be crucial for Mexican growth.

The rating agency considers that, although Sheinbaum leads the polls, in some cases by a wide margin, the elections could still be close if support for Gálvez is underestimated. In Mexico there is no runoff vote.

Although the new president will take office in October, Moody's pointed out that the new congress will begin meeting a month earlier, on September 1.

“If Mexicans vote for members of Congress according to their presidential preferences, Morena and its allies could obtain a simple small majority. However, if they reach a two-thirds majority, Morena and its allies will likely push for constitutional changes in September when AMLO is still in office,” it warned.