Image credits: Ehud Neuhaus
News Article

More Debt Could Benefit the Mexican Economy

By Sofía Hanna | Fri, 01/15/2021 - 17:10

Since AMLO became president, one of his main promises was to not incur in more debt to avoid the national debt to increase relative to GDP. However, a recent Moody’s study shows that more debt could actually benefit the Mexican economy.

During a press conference, Ariane Ortiz-Bollin, Analyst at credit rating agency Moody’s, told Forbes that the money spent by the Mexican government "is not bad in itself if it is productive and positively linked to growth." The agency expects Mexico to recover to pre-pandemic levels by 2023. If the country acquired more debt and destined it to help specific groups that drive economic growth, it could actually help the economy to recover.

In Mexico's current context, minimizing debt sounds like the logical thing to do. Until 2020, this strategy could work because of lockdowns and market uncertainty. However, this year, the situation has changed. The biggest risks that could come from maintaining the current strategy, according to Moody's, are "a deterioration in the economic growth outlook in the face of more aggressive lockdowns, pressure from PEMEX on public finances and its impact on debt and a threat to Banxico's autonomy," reports Forbes.

Infobae reports that before 2013, the national debt was kept below 40 percent of the GDP. When Enrique Peña Nieto became president, the debt started to rise and reached its highest level in 2016 at 48.6 percent of the GDP. In 2020, the GDP sunk 17.3 percent between April and June. In terms of economic recovery, Mexico was already going through a mild recession since 2019. In 2020, the economy fell 9 percent and in the best of scenarios, there would be a "full" recovery until 2023, meaning there would not be real growth before that, said Moody's.

As previously mentioned in an MBN article, in 2021, Mexico's GDP is expected to increase by 3.8 percent. This rate is positive but does not overcome the historic 9 percent decrease seen in 2020. "A balance is necessary between financial stability and support for homes and business that were the most affected by, for example, reorienting expenditure toward profitable projects or giving development banking a more active role," said Alejandro Saldaña, Chief Economist of the Financing Group BX+.

When it comes to acquiring new debt, however, there has been no change in the government’s strategy, at least as of September. "The peso has been rising in value for seven weeks, which also influences the decrease in the amount of debt. I do not see any risk. Hopefully there will not be a new peak in the pandemic and hopefully there will not be a renewed economic crisis," said the president back on Sept. 22, 2020, during a morning press conference.

The data used in this article was sourced from:  
MBN, Forbes, Infobae, El Economista
Photo by:   Ehud Neuhaus, Unsplash
Sofía Hanna Sofía Hanna Junior Journalist and Industry Analyst