Economics: Afores (private pension funds) could be the next source for financing the growing public deficit

MEXICO - Report 15 Oct 2024 by Mauricio González and Francisco González

Public finances have continually weakened, especially in the past three years, with ever-increasing public deficits. For 2024, it is estimated that the public deficit will close at nearly 6% of GDP. The factors underpinning this forecast are that the federal government accelerated its spending to try to conclude the emblematic public work projects of the previous administration and in the context of the election campaign to deliver ahead of schedule the cash transfers through social programs, which significantly increased the overall amount paid in the first half of this year.

In this context, it is felt that one possibility to access greater internal resources to finance the growing public deficit that could be on the new administration's radar would be to encourage Afores to allocate a greater percentage of their portfolio to government securities (public debt). However, considering this as a source of additional domestic indebtedness would not solve the vulnerability of public finances with respect to payment capacity in the medium and long term. This week’s edition of Weekly Trends: Mexico Economy analyzes the recent evolution of the Afores' funds and their participation as a source of public financing.

In economic indicators, this past week the industrial activity index was published, indicating a seasonally adjusted annual 0.3% decline, mainly attributable to the sharp drop in civil engineering projects (-23.4%). Meanwhile, manufacturing maintained weak growth, increasing 0.7% in August and registering zero growth on average for the first eight months of the year.

September inflation figures were also published, with annual price increases clocking in at 4.58% vs. 4.99% a month earlier. A large part of this decrease was due to the non-core component, which posted an annual 6.5% increase. With the recent results of price increases, we believe it will be very difficult for Banxico's projection of 3.4% core inflation by December 2024 to be met.

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