Mexico: Fiscal dynamics back in focus

Research evidence excerpt

Mexico: Fiscal dynamics back in focus

IdeaM

Julia Lobato, Fernando Sedano

Mexico’s recent sovereign-rating actions have put fiscal dynamics back at the center of the

debate. We think most of the fiscal adjustment is behind us: after the 2024 election-year

deterioration, the 2025 consolidation relied heavily on cuts to physical investment and non-

payroll operating spending. Recent data reinforce this view. Despite a YTD fiscal deficit that

is printing better than programmed due to spending under-execution, YTD revenues are

falling in real terms while expenditures are rising; oil revenues disappoint, and recurrent

and protected spending continues to expand at the expense of investment. This reflects a

longer-term increase in budget rigidity, with core and broad measures of rigidity now close

to 64% and 78% of total expenditure, respectively. We therefore expect a somewhat slower

fiscal consolidation than that projected by authorities, forecasting RFSP at 4.6% of GDP in

2026 and 4.2% in 2027. Ultimately, a tax reform that broadens recurring non-oil revenues

will likely be needed, but political appetite appears limited before the 2027 midterm

elections.

Mexico’s fiscal dynamics are back in focus following two adverse sovereign-rating

actions. Moody’s lowered Mexico to Baa3 (from Baa2) and moved the outlook to stable,

citing weakening fiscal strength driven by spending rigidities, continued support for Pemex

and eroding fiscal-policy anchors. S&P, meanwhile, affirmed Mexico’s BBB foreign-currency

rating but revised the outlook to negative, pointing to weak growth, budget constraints,

expenditure rigidities and contingent liabilities that could slow fiscal consolidation and

push debt and the interest burden higher. This is consistent with the challenge we flagged