Mexico economic outlook, January 2025

This possibility becomes noteworthy, especially in light of recent economic figures. Over the first three quarters of 2024, GDP grew by an average of 1.5% year over year (YOY). Compared with the same periods in 2023, the average growth was 3.6% YOY, and, in 2022, 3.4%—denoting a clear slowdown.⁴ Additionally, high-frequency indicators—such as PMI⁵ and monthly GDP trackers⁶—for October 2024 suggest that economic activity would likely contract in the fourth quarter, so the start of 2025 might not be particularly positive either.

Speaking of what is to come next year, the public budget presented in November projects a reduction in spending of almost 1.9% in real terms, compared with 2024.⁷ This contraction is generalized across different areas of administration but is more pronounced in investment expenditures, which are likely to fall by 14% annually, while physical investment could fall by 12.7%.⁸

This is relevant because a large part of recent growth numbers come from government investment in the construction of its flagship projects, such as the Dos Bocas Refinery in Tabasco, the Felipe Ángeles International Airport in the state of Mexico, and the Tren Maya in the Yucatan Peninsula. Considering 2023 growth statistics, almost half of the value added was generated in the construction sector; and within this, the majority came from infrastructure construction.

This gap, which was filled by a single sector, would be difficult to bridge in the near term.

Finally, the uncertainty around Mexico’s economic growth trajectory has risen since announcement of President-elect Donald Trump’s upcoming second term in the United States. Trump’s administration arrives with campaign proposals that could severely affect the fundamentals of the Mexican economy (such as mass deportation of immigrants, the imposition of tariffs directed at vehicle exports, and the complete review of the United States-Mexico-Canada agreement [USMCA]).⁹

For now, Deloitte’s baseline scenario (see “About Deloitte’s projections” for details) does not contemplate a recession in 2025, but rather low growth of 1%. However, the country faces a higher probability of economic contraction this time, compared with previous years. Robust output from economic activity is imperative for government’s short-term macroeconomic stability projections to be fulfilled.

The first steps of the judicial system reform

The judicial reform proposed by former President López Obrador has been controversial for the private sector.¹⁰ The justice system is one of the most challenging areas of governance in Mexico—the country has been ranked on numerous occasions, by the World Justice Project, as among nations with the weakest rule of law,¹¹ with impunity levels rising to over 90% in most of the cases.¹²

Though the need for change is profound, the announcement of this reform, in February 2024, and its approval by Congress, in September 2024, have injected volatility into financial markets and uncertainty into the investment climate, as reported by think tanks and various institutions.¹³

The reform, among other things, proposes the election of judges and ministers through a popular vote from a list of candidates filtered by the Congress, the current judicial system, and the president. This procedure replaces the current scheme in which these positions are appointed based on the mechanisms established in a professional career of service. Additionally, one of the aspects that has attracted the most attention is the creation of a judicial discipline tribunal that will have the authority to review sentences and, if necessary, penalize judges with permanent disqualification or even criminal convictions.¹⁴

Given that the current political party (Morena) has dominated recent elections and controls the presidency, Congress, and a majority of state governments, the reform may change the balance of power in an institution that, until now, had remained independent, and in some instances, had even been perceived as a counterweight to the ruling party’s decisions and power.

The reform has already been approved and is currently being implemented: The aim is to hold the first popular vote to elect nearly 900 positions into the judicial system, including the members of the Supreme Court of Justice, on June 1, 2025. It is noteworthy, however, that in places like Mexico City, people would have to vote for more than 100 positions in a single day. Despite this, it is foreseeable that the justice apparatus in Mexico will be radically different from the current one over the course of 2025 itself.

First, this will generate judicial unresponsiveness that could affect the interests of companies and individuals. At the moment, this is already beginning, as strikes by judges who will be replaced this year have halted proceedings in various courts.¹⁵

Second, there is uncertainty about the profile of the new justice system in Mexico, especially for companies that have ongoing disputes with the government, as they may face new complexities while trying to advance their cases. Companies in the energy, mining, and public infrastructure construction sectors could be the most vulnerable, as evidenced by declines in stock market indices.

Furthermore, since certainty in the rule of law is one of the most important factors for developing investments, these judiciary changes will possibly act as headwinds for foreign investment opportunities. Our previous quarterly investment monitor already recorded a drop of more than 75%, year over year, in the number of investment announcements in the first eight months of 2024 (figure 2), and this trend could continue until there is more clarity about the terms and conditions to which investors and entrepreneurs will be subjected to achieve a viable business operations.

A new reality for Pemex

Another recent key reform approved by the Mexican Congress has to do with the status of state-owned enterprises. Due to the current and historical influence it has had on public finances, Petróleos Mexicanos or Pemex, Mexico’s state-owned petroleum corporation, stands out. In accordance with new laws, the oil company will cease to be a productive state enterprise and become a public state enterprise.¹⁶ Beyond the change in nomenclature, this is a full-fledged transformation, as the new regime removes the financial mandates that Pemex previously had and instead assigns it the central function of, together with the Federal Electricity Commission (CFE), guaranteeing the nation's energy sovereignty at whatever cost is necessary.¹⁷

Although the company's finances will no longer be a valid parameter to measure performance, the balance it has carried over from previous years cannot be ignored. As of 2024, the company's financial debt is close to US$100 billion (figure 3),¹⁸ which accounts for around 5.5% of GDP, and, in comparative terms, is similar to the balance of the Mexican federal government's net external debt, which stood at US$123 billion at the end of the second quarter of 2024. Currently, Mexico’s total debt stands at around US$900 billion and comprises 51% of GDP. Pemex is not only one of the most indebted major oil producers in the world,¹⁹ but also one of the least profitable. In the third quarter of 2024 alone, it recorded a net loss of more than US$8 billion, which increasingly complicates its refinancing conditions and general access to financial markets.

By removing focus from financial metrics, the energy reform could accentuate this trend: It is possible that the company will require constant capital injections from the federal government to meet its loan-repayment obligations. This foreseeable scenario fuels speculation that the government could be considering exchanging the company’s debt for sovereign debt in the medium term, which would undoubtedly be disruptive for public finances.

Additionally, it remains to be seen what the position of the new government will be regarding renewable energies and private investment, as both Pemex and CFE will require support to achieve their production metrics. Although the complicated situation of public companies is a significant risk, it could also open the door for opportunities.

Is Mexico’s investment grade at risk?

In mid-November, the government presented the 2025 Economic Package, which contains plans for income and expenditure, along with key assumptions for the public finance framework for 2025. This information was widely expected by markets and analysts, because during the last year of the López Obrador administration, the public deficit increased considerably, from an average of 2.7% between 2019 and 2023 to 5.9% in 2024. This increase, coupled with the structural growth limits that the Mexican economy faces, resulted in an increase in the debt-to-GDP ratio, from 44.8% to 51.4%, in the six-year term that just ended.

Although this level does not jeopardize the sustainability of government’s debt-service payments, the trend suggested faster deterioration in the coming years. The three main credit-rating agencies have adopted a cautious stance and, in fact, have downgraded the sovereign rating to some extent over the last three years: Fitch Ratings places the Mexican government’s debt one level above the investment-grade threshold, while S&P Global Ratings and Moody’s keep a gap of two levels. The latter, however, revised its outlook from stable to negative one day before the information on the economic package was released, which has fueled investor anxiety about what is to come in the future.²⁰

Along with Chile, Peru, and Uruguay, Mexico is one of the few countries with an investment grade in Latin America; it also has the deepest financial markets and is the most connected with the global economy.²¹ Any loss of such a grade could substantially affect economic fundamentals, as demonstrated by the case of Brazil in 2015,²² which led to a depreciation of the real by more than 70%, a collapse of investment, and a growth crisis from which it is only now recovering. However, nowadays, Mexico is far from that.

To avoid such a scenario, the key lies in moderating the deficit over the next six years, and although what is proposed in the 2025 economic package points in that direction, the future looks uncertain. The package proposes that the deficit could fall from 5.9% to 3.9% (figure 4) and to 3.2% in 2026, until stabilizing at 2.9% between 2027 and 2030. However, the assumptions for this to be achieved are somewhat weak, as the government estimates economic growth of 2.3%, when the consensus of economists is that this growth is likely to be 1%,²³ and, as mentioned in the initial section, the probability of a recession is not minor.

Lower-than-estimated growth will affect public revenue, and, therefore, drive less deficit containment. Similar problems will likely be replicated for other assumptions, for example, the exchange rate, which is expected to be US$18.5 compared with the consensus of US$20.50, could meaningfully impact the amount destined to pay financial interest arising from the external debt, and the oil production platform that is expected to produce 1.9 million barrels per day in 2025, when 2024 levels have been closer to 1.5 million and with a downward trend, could also reduce the government’s income and push for a different scenario than the one that is planned.

Beyond the proposals that are now being made, credit rating agencies will evaluate the performance of the real data and decide on their next actions in 2025. Although it is possible that no rating downgrades will occur in 2025, we do believe that the three agencies will align with a negative outlook, which will leave a great deal of suspense for the situation of the sovereign rating for 2026.

New government in the United States

The 2024 election in Mexico’s immediate neighbor to the north resulted in unified government, with Republicans winning both chambers of Congress and the White House, results that will grant the president-elect room to maneuver during the four years of his second term.

It is important to bear in mind that actual policy results may differ considerably from campaign promises. This is true for the president-elect’s past administration, which ended up altering preexisting trends only mildly (figures 5 and 6).

For Mexico—with a trade volume of US$746 billion (figure 5)—this bilateral relationship is significant. Additionally, nearly 11% of the population in the United States is of Mexican descent,²⁴ contributing to outflow remittances to Mexico, which represent between 3.5% and 4% of Mexico's GDP.

One of the key elements to monitor will be the trajectory of tariff imposition, both generally and differentiated by country. The strategy outlined by the Trump campaign proposes a universal tariff of 10% on imports regardless of origin: For Chinese imports, a 60% tariff has been promised, while for Mexico, they could possibly be up to 25%.²⁵

This threat is mixed, with a review of the USMCA being scheduled in 2026.²⁶ The joint review will allow each party to reflect on the evolution of trade relations since the USMCA was implemented and to identify areas of improvement for the benefit of all three countries, which could potentially lead to changes in the agreement. However, some may question the United States’ continued participation in the agreement.

This is one of the risk elements that could have the greatest of repercussions, as it would generate a decoupling of global value chains, a probable slowdown in global growth, and be a difficult burden for the Mexican export apparatus to overcome (but also for US exports). In 2024, the manufacturing industry accounted for around 90% of the Mexican exports and contributed 20% of the value added to GDP. This pattern was made possible by the free trade agreements that have been in place since 1994, when manufactures accounted for around 75% of total exports. Therefore, the breaking of these agreements (that we do not consider very likely) would have a significant impact for one of the key sectors for growth.

Finally, there is uncertainty around the potential changes to US immigration policy, particularly as it relates to possible deportations, which could have large implications on Mexico’s economy (figure 6).

An aggressive approach to managing migration could severely affect the inflow of remittances to Mexico: Until September 2024, these have seen a cumulative growth of only 2.8% of Mexico’s GDP, compared with 8.9% in 2023. Additionally, this could exacerbate the difficult humanitarian situation experienced in transit cities along the migration route.²⁷

Although the risk from all these factors would take some time to materialize, more clarity around the implementation of reforms and Trump’s second-term policy will likely shine light on Mexico’s future economic trajectory, and what the government can do to drive it in the right direction.