Despite progress on poverty, Mexico’s first female president inherits a shaky economy

Mexico’s first female president, leftwing academic and climate scientist Claudia Sheinbaum, has set out her agenda. She pledged to maintain the social policies of her mentor and predecessor, the widely popular former president Andrés Manuel López Obrador (commonly known by his initials, AMLO).

She promised a transition to green energy, and set out the need for new infrastructure in railways, ports and airports. Sheinbaum inherits a US$1.79 trillion (£1.4 trillion) economy closely integrated to that of the US – in fact, Mexico has the second-largest economy in Latin America. It is also the most populous Spanish-speaking country in the world with 128 million people.

But Sheinbaum also inherits Mexico’s largest budget deficit since the 1980s.

Despite social policies that have seen 9.5 million Mexicans lifted from poverty during AMLO’s six-year term, 36% of Mexicans are still poor and 7% live in extreme poverty. Access to health services remains problematic, and has worsened for those living in deprivation.

Gross domestic product per capita, a measure of wealth, actually fell during the previous administration, which means the “average” Mexican is worse off now than at the start of AMLO’s presidency. And next year, the central bank estimates GDP will grow by only 1.2%, which will inevitably constrain Sheinbaum in her early years in office.

While campaigning, she promised to continue the social and political policies of her predecessor. Now in office, she will not only grapple with the country’s security situation but also navigate serious economic and fiscal challenges.

Read more: As Mexico’s new president takes office, a renewed battle to contain cartel violence begins

In 2018, AMLO took office in a relatively stable fiscal environment. His predecessor, Enrique Peña Nieto, had implemented significant reforms early in his term aimed at reducing reliance on oil revenues and energy subsidies.

Nieto also sought to strengthen the country’s two stabilisation funds. The Oil Revenue Stabilisation Fund is aimed at protecting Mexico’s budget from fluctuations in oil revenues. Meanwhile, the Budget Income Stabilisation Fund seeks to stabilise budget revenues from non-oil sources, such as taxes.

These funds have been crucial for maintaining economic stability given the volatility of commodity prices, especially since oil has historically been a key contributor to Mexico’s public finances. However, under AMLO’s administration, both funds were used to plug gaps, leaving them depleted and raising concerns about the country’s ability to weather economic downturns. The country has not balanced its books since 2007.

High energy subsidies introduced in 2019 are putting a strain on public finances. Driven by a commitment by AMLO to shield consumers from rising international oil prices, subsidies increased as a result of the COVID pandemic in 2020, and again in 2022 amid the war in Ukraine.

The recent rise in social spending to fund universal state pensions, social programmes and debt servicing has created considerable strain, pushing the deficit close to 6% of GDP. Mexico’s debt-to-GDP ratio is 50% this year, up from its 2018 level.

The tax issue

In most countries, tax revenues are used to fund social investment. But Mexico’s ability to raise taxes has been extremely limited – tax revenues amount to just 17% of the country’s GDP, below the Latin American average of 22%, and well below that of countries in the Organisation for Economic Co-operation and Development (OECD) at 34%.

Mexico has a large informal economy, with many workers and businesses not registered with tax authorities. Corruption, inefficiencies in tax administration and lack of trust in government institutions have led to low tax compliance, while efforts to increase taxes on the wealthy have met political resistance.

Mexico has high levels of income inequality, and the wealthiest segments of society contribute relatively little to the overall tax revenue. Instead, the country had historically relied on oil revenues – which have declined – to fund public services and investment.

AMLO had launched popular social programmes aimed at reducing poverty and inequalities. Now SheiNBAum has promised increased social spending while maintaining “fiscal responsibility” and not reforming tax (at least in her early presidency). That promise seems unrealistic. Without a change of approach, a fiscal crisis looms.

However, she is expected to be a more pragmatic president than her predecessor. In part because she is less ideology-driven, but also because she won’t have a choice. If she wants to boost the economy and keep reducing poverty, she will need to attract foreign investment and encourage the private sector to play a much bigger role.

Infrastructure will be a key focus, not least to ensure Mexico can benefit from the process of “near-shoring” – the relocation by multinationals of key processes away from Asia closer to the US market in order to minimise supply chain disruptions.

Mexico stands to gain from the current desire by many companies to operate closer to the USA. As a result of the US-Mexico-Canada Agreement (USMCA), and its predecessor Nafta (North American Free Trade Agreement), Mexico enjoys tariff-free trade with its northern neighbours.

But the country has not fully benefited from those opportunities. It lacks a consolidated investment promotion strategy and needs to produce more energy, ensuring it is from cleaner sources.

Companies keen to invest in Mexico need access to low-emission hydrocarbons, as well as renewable energy. But AMLO viewed oil as a key part of Mexico’s sovereignty, eradicating previous reforms that had opened up the energy sector to private companies and preventing private investment in renewable energy. Instead, public finances were used to prop up ailing state-owned oil monopoly Pemex and national electricity company CFE.

Given the fiscal challenges Sheinbaum inherits, Mexicans can expect the private sector to play a much greater role in infrastructure investment and in making the green energy transition a reality.

As mayor of Mexico City, she championed public-private partnerships (PPP) while promoting solar energy. But to entice factories from Asia, she will also have to weaken the grip of the criminal organisations which are believed to control as much as a third of Mexico.

During her tenure as mayor she halved the number of murders in the capital. But attempting to replicate this success throughout the country will be no small undertaking.