Increased spending by 2024 will put pressure on interest rates and inflation: BofA

Increased spending and budget deficits proposed by the Mexican government for 2024 will put pressure on monetary policy and the country’s inflation rate, Bank of America Securities (BofA) estimated Tuesday.

On August 8, the Mexican government sent to Congress its economic package 2024which estimates the budget deficit at 5.4% of gross domestic product (GDP), the largest in more than 20 years, and an increase in spending of 1.2 points of GDP.

In its analysis, Bank of America indicated that higher budget deficits put upward pressure on interest rates Bank of Mexico (Banxico) because it would mean issuing more bonds than expected in advance, which would “renewally put the possibility of a possible downgrade on the line.”

In this sense, he expected that increased spending would give an additional boost to an already overheated economy, which would fuel more inflation and influences Mexico’s central bank to support target interest rate high for a longer period of time.

We suspended Banxico with the first cut in June 2024, but overall this budget puts more upward pressure on inflation and on Banxico.

For him Bank of AmericaThe main driver of the fiscal deterioration will be the expected increase in spending by 1.2 points of GDP compared to 2023, as the Ministry of Finance and Public Credit (SHCP) estimates an increase in spending on economic support of the population to 26.2%.

Meanwhile, he stressed that the Mexican government predicts drop in income from 21.7% to 21.3% of GDP in 2024.

“The slowdown in GDP growth poses a risk to lower incomes. And we see potential risks of rising costs: higher interest rates Long term, more support for Pemex and possibly close federal elections,” he added.

Additionally, Bank Banorte’s analysis shows Mexico’s GDP growth estimate for 2023 and 2024 to be between 2.5% and 3.5% is in line with its previous estimates.

“This is said to be due to the dynamism of domestic sectors, with some of the more obvious results of ‘nearshoring’,” he added in his commentary.

For his part, he noted that reducing the private investment benefit (DUC) from 40% to 35% will allow the financial costs of the state-owned company Mexican oil (Pemex) decreases and will mean a zero net balance for the company.

He noted that the Treasury said this would allow it to cover just over 80% of its debt maturing in 2024.

He Congress Mexico has until the end of October to approve the revenue portion of the economic package and until November 15 to approve the Mexican government’s 2024 public budget.


Source: Aristegui Noticias