Mexico is struggling to win over bond markets

WHEN MEXICO presents its budget for 2027, which the government of Claudia Sheinbaum must do by September 8th, the stakes will be unusually high. In May one credit-rating agency, Moody’s, downgraded Mexican government debt to a notch above junk. Another, S&P Global, warned it could do so soon. A third, Fitch, already rates Mexican bonds as barely investment grade. Mexico is paying over the odds to borrow in dollars: yields on its ten-year dollar bonds are 6.4%, higher than for many junk-rated countries like Guatemala. The government is paying 9.3% to borrow for ten years in pesos, up from a two-year low of 8.5% last October. “Budget credibility is key,” says Renzo Merino of Moody’s.

Mexico had won that credibility in recent decades. But in 2024, as Ms Sheinbaum’s took over from her leftist predecessor and mentor, Andrés Manuel López Obrador, the fiscal deficit reached 5.7% of GDP, the highest in almost 40 years. It has since hovered around 5%. Ms Sheinbaum says it will fall to 4.1% next year, but that is still higher than ideal. With economic growth around 1%, public debt has risen from 52% of GDP in 2019 to 63%. Three-quarters of the budget goes on pensions, social transfers and servicing debt. Pemex, Mexico’s state oil giant, is draining a lot of what is left. The government has given it $130bn since 2018 (not counting off-budget support). México Evalúa, a think-tank, calculates that of every ten pesos Pemex sent to the treasury between January and June, almost eight flowed right back.

The result is stingy public investment, which Mexico needs if growth is to pick up. Private investment, too, is weak: it fell for 19 straight months until the end of March. Hopes that trade wars would lead multinational companies to “nearshore” supply chains closer to American customers have mostly been dashed. Investor confidence has been hit by uncertainty over the fate of the United States-Mexico-Canada Agreement (USMCA), which America’s president is dismantling. Domestic reforms, notably to elect judges, raise questions about Mexico’s rule of law.

Ms Sheinbaum knows all this. She has drawn up sensible economic plans and been more welcoming to investors than Mr López Obrador. She wants Pemex to be financially self-sufficient by 2027. She has tried to raise revenue by squeezing more tax out of big firms and adding levies on sugar. Increasingly, though, she is letting out her inner leftie. She dismissed Moody’s downgrade in May as being of “the neoliberal era”. She seems unwilling to contemplate cutting social transfers (and certainly not before the midterm election in 2027). Privatising Pemex is a non-starter.

Mexico will probably avert the indignity of junk status. It is a large diversified economy with (for now) easy access to the world’s biggest market. It would take a new shock—a total collapse of the USMCA, say—to provoke such a downgrade. On August 31st the central bank revised up its growth forecast for this year to 1.5%. For Mexican yields to fall, however, the bond markets will take more convincing.■