HR Ratings Cites Growth Risks to Mexico's Fiscal Plan

Credit rating agency HR Ratings has raised doubts about Mexico’s Ministry of Finance’s ability to achieve its 2026 primary surplus target of MX$171.3 billion, citing slower Income Tax revenue growth, weaker economic activity, and persistent spending pressures. The gap between the government’s fiscal assumptions and private-sector GDP growth forecasts of 1.1% could push the budget deficit above 4.0% of GDP, complicating Mexico’s fiscal consolidation efforts. 

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HR Ratings has expressed doubts over whether Mexico’s Ministry of Finance and Public Credit (SHCP) will achieve its 2026 primary surplus target of MX$171.3 billion (US$9.94 billion). According to the agency, the federal government would need to generate a primary surplus of MX$57.4 billion (US$3.33 billion) during the second half of the year to meet its fiscal objective—an outcome HR Ratings considers optimistic given slower economic growth, decelerating tax revenue collection, and persistent spending pressures.

The warning underscores the structural challenges facing Mexico's public finances during the second half of the fiscal year, when current expenditure typically accelerates, particularly on personnel and general administrative expenses. This seasonal spending pattern makes a shift to a primary surplus difficult without significant expenditure restraint or stronger-than-expected revenue growth. By comparison, Mexico recorded a primary deficit of MX$292.2 billion (US$16.96 billion) in 2H25.

Weak Tax Collection Weighs on Fiscal Performance

Although fiscal results for 1H26 outperformed the government's budget calendar, underlying public finance trends weakened compared to the previous year. The budget deficit reached MX$577.4 billion (US$33.52 billion) in 1H26, below the MX$937 billion (US$54.39 billion) projected by SHCP, largely due to lower debt-service costs and the posting of an early primary surplus. However, the deficit was still 24% larger than the MX$465.5 billion (US$27.02 billion) recorded during the same period in 2025. According to HR Ratings, expenditure consolidation has not been sufficient to offset weakening revenue momentum.

Budgetary revenues increased just 0.1% in real annual terms during the first half of the year. The main source of weakness was Income Tax (ISR) collection, which declined 6.2% in real terms amid slower economic activity and a less dynamic labor market. Although Value Added Tax (VAT) revenue rose 10.6% and oil-related revenue improved compared with 2025, these gains were insufficient to offset the broader slowdown in tax collection. Meanwhile, total budgetary expenditure increased 2.1% in real annual terms, driven by higher current spending, while public investment in physical infrastructure contracted once again.

Public Spending Freeze Avoids Root Causes of Fiscal Imbalance

Persistent weakness in physical capital allocation poses ongoing challenges for Mexico's economic expansion as the federal government curtails public expenditure to manage its fiscal balance. In the first five months of 2026, the federal government executed a record MX$418 billion (US$24.26 billion) underspend, running 9.5% below the programmed budget — representing 1.2% of GDP and marking the largest under-execution for the period since 2005, according to think tank Mexico Evalúa.

"The under-spending is strong and has been expanding as the year progresses," stated Iván Arias, Director of Economic Studies, Banamex. Arias warned that halting capital expenditure stalls essential public infrastructure projects and systematically limits broader domestic activity.

This fiscal contraction reflects efforts to reassure international debt markets, yet it comes amidst heightened pressure from credit rating agencies concerned over structural spending rigidity. Moody's Ratings downgraded Mexico's sovereign credit rating to Baa3, citing ongoing support for PEMEX and rising interest payments that now absorb roughly 17% of government revenues, up from 10% in 2021. Concurrently, S&P Global Ratings revised Mexico's outlook to negative, as Public Sector Borrowing Requirements (RFSP) surged 42% in real terms to MX$527.6 billion (US$30.62 billion), pushing total historical debt to a record MX$18.9 trillion (US$1.1 trillion) by May 2026.

Héctor Villarreal, Director, Initiative for the Economic and Demographic Transition (ITED), warned that with structural tax reform unlikely before the 2027 midterm elections, persistent deficits will trigger a severe fiscal adjustment by 2028. Consequently, Mexico faces an increasing reliance on private sector investment and structural policy clarity to sustain medium-term capital formation and revenue growth.

Growth Forecast Adjustments 

As a result of these budgetary realities, HR Ratings maintained its 2026 GDP growth projection for Mexico at 1.1%, treating the economic expansion observed in the second quarter as a temporary bounce. The agency anticipated that revenue deceleration will continue to exert pressure on public finances throughout 2H26. Consequently, the General Economic Policy Guidelines for 2027, which SHCP will present to Congress in September, will be critical in establishing whether the federal government formally adjusts its projections for growth, tax receipts, and fiscal balances.

The rating agency's stance aligns with a wider gap between government fiscal targets and private market consensus. Financial institutions including Scotiabank, Mifel, and the Organization for Economic Co-operation and Development have adjusted their 2026 GDP growth forecasts below 1.0%, with individual estimates by the former falling to 0.7%. While SHCP maintains an official growth projection of 2.3% and projects a fiscal deficit near 3.6% of GDP, private market expectations place the fiscal deficit above 4.0% of GDP, with some market projections approaching 5.0%.