Economics: Year-end results confirm the latest episode in the ongoing deterioration of public finances, with no end in sight
A profound deterioration of public finances played out in 2024, as we had anticipated as far back as when we analyzed the economic package projected for last calendar year that was published in September 2023. The year 2024 brought troubling trends in revenue, as well as in the degree of growth and structure of expenditure, which caused relatively high deficits (budgetary, federal government and primary, as well as public sector borrowing requirements) and a consequent rise in public debt. Within this framework, and as has been the custom for several years now, the tenor of the Ministry of Finance's Report on Public Finance was exceedingly optimistic even as various shortcomings were obvious.
The evolution of revenues, the structure and rigidity of spending, and the growth of public debt will complicate the execution of public finance and the fiscal adjustment planned for 2025 which, among other aspects, call for lowering the budget deficit from 5.1% of GDP (our estimate) to 3.2%, and the PSBR from 6% to 3.9% of GDP. Although profits the Bank of Mexico has generated could contribute to such a scenario by channeling such funds to the Federal Government for debt repayment and into contingency funds—it is estimated that between 0.3% and 0.5% of GDP could be transferred—this margin seems insufficient in the face of the pressures that Pemex will generate via the capital support already authorized in the Budget and the reduction of tax rates to 30% in oil extraction and 12% in non-associated gas, as well as subsidies to the CFE. In this week’s Outlook, we analyze the public finance figures through the end of 2024 and their prospects for 2025.
In last week's indicators, industrial production contracted 2.4% yoy and a sequential 1.4% in December 2024, according to seasonally adjusted figures. As a result, industrial production was flat for the full year (0.1%), in contrast with the increase observed in 2023 (3.4%). The component that exhibited the greatest deterioration was construction. We should get a clearer picture of activity this week with the final Gross Domestic Product (GDP) figures for the fourth quarter of 2024, which we estimate will be closely in line with the timely data published a few weeks ago.
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