Mexico's next president is expected to grapple with limited governing budget

Mexico is almost certain to elect its first female president in June — both leading candidates are women — but it’s almost equally as certain that she won’t have much room to act independently of outgoing President Andrés Manuel López Obrador.

The populist president has continued proposing new, expensive projects in the closing months of his administration, before he leaves office on Sept. 30. He will also leave a lot of big-ticket projects unfinished.

That will probably leave his successor with her hands tied for much of her six-year term. Even if opposition candidate Xóchitl Gálvez wins, a mountain of financial commitments will weigh on her. The candidate of López Obrador's party, former Mexico City mayor Claudia Sheinbaum, leads in polls. A third male candidate from a small party has almost no chance of winning.

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"The next administration will inherit a country with a financial hole that will limit the maneuvering room throughout the next term," said Moody’s Analytics Director Alfredo Coutiño. "In order to deactivate the current fiscal vulnerability, the incoming administration will have to adjust fiscally (spending or taxes) in 2025."

López Obrador has said that before he steps down, he'll expropriate U.S.-owned Vulcan Materials, a move which could cost the Mexican government as much as $1.9 billion if the Alabama-based quarry company wins an ongoing international arbitration complaint against Mexico.

Then there is a yet-to-be-fleshed-out promise to bring passenger trains back to Mexico before he leaves office. On Nov. 20, López Obrador published a decree stating that if private freight operators refuse to run passenger service, the government would step in to do so.

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While the trains would have to run on tracks run by the private concessionary operators — Mexico folded its money-losing state-run railroads in the late 1990s — the government would probably have to buy the trains, fix up stations and set up a ticket-selling scheme.

The money-losing ideas keep coming. On Dec. 26, López Obrador launched a state-owned airline at a time when most countries have decided to shut down or sell off their own. With guaranteed ultra-low ticket prices on flights to little-used, government-run airports, the prospects for hemorrhaging cash are endless.

To cap it all off, on Feb. 5 he announced the government would guarantee workers retirement at full pay.

The plan, once explained, was less generous than originally depicted. Only workers in official retirement plans would have their pensions topped up, and only to the level of the median wage of registered employees to about $10,000 per year. Still, that will probably cost billions of dollars.

On that same day Sheinbaum, who is running for López Obrador’s Morena party and is viewed as his most devoted follower, claimed she would carry out the president’s programs, and add a few of her own.

"Of course these (López Obrador’s programs) are the foundations, the base of what our government will be, and what’s more we are going to present other proposals," Sheinbaum said.

But almost as soon as she spoke, evidence emerged that she won’t have the financial power to do so.

A few days later, Moody’s rating service downgraded the debt of the national oil company, Petroleos Mexicanos, or Pemex, even further into junk bond status.

Moody's based that on "projections of the government’s further deterioration in fiscal conditions in 2024," due to "a material increase in the deficit, fueled by social spending, persistently high borrowing costs, and augmented expenditures in flagship projects."

Consider what the next president will find on her plate: She will have to finish an oft-delayed, $20 billion oil refinery plagued by cost overruns. There's a similarly priced, 950-mile (1,530-kilometer) railway meant to run in a rough loop around the Yucatan peninsula to connect beach resorts and archaeological sites. López Obrador considers both to be his flagship projects, but the train is far from finished.

Work also won't be completed on modernizing other oil refineries, or on a train service leading into Mexico City, or yet another train service crossing from the Pacific to the Gulf of Mexico. A host of other building projects are still unfinished as well.

López Obrador claimed at the start of his administration in 2018 that all these projects would be finished by the time he left office, and that all would be paid for out of government cost-cutting and reducing corruption. That turned out not to be true.

"In fact, last year we finished with a budget deficit of 3.4% of GDP, the highest since 1989," said Gabriela Siller, the director of analysis at Nuevo Leon-based Banco Base. "This year they are predicting a deficit of 4.9% of GDP, the highest since 1988, and debt means more borrowing. Their numbers don't add up."

The infrastructure projects — the planes and trains — are unlikely to ever turn a profit at the current pace.

For example, the first section of the Maya Train project on the Yucatan peninsula carried about 1,780 foreign tourists in its first two months, or about five per train run.

The original plan stated tourists would be the train’s most lucrative source of income, but now officials are suggesting the train’s revenue could come from short commuter runs or freight shipments. The peninsula has little industry and nothing suggests there is an urgent need for trains to carry shipments of sunscreen.

López Obrador has defended his free spending ways and increased debt, saying it was less than the debt his predecessors had piled up.

"We are going to be lower in the percent of borrowing than (Enrique) Peña and (Felipe) Calderon," the president said in September.

Mexico's debt currently is around 50% of its GDP. While that doesn't sound high compared to the United Kingdom and United States, who are both around 100%, Mexico has additional debt held by the state-owned oil company and doesn't have unlimited access to low-cost borrowing, like the U.S. does.

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Historian Lorenzo Meyer wrote in the newspaper El Universal that López Obrador’s actions were not "an attempt to limit his successor’s freedom of action, but rather as a productive investment of the huge political capital he has built up to help the new administration start off."

The biggest bombshell ever handed by an outgoing president to his successor in Mexico came on Sept. 1, 1982, when President José López Portillo, who had three months left in office, announced that he was expropriating the entire banking industry amid a currency devaluation and debt crisis.

His successor, Miguel de la Madrid, spent his entire six-year term struggling to deal with the fallout and paying the huge debt to bank owners.

López Obrador's debt mountain, while less dramatic, is "a way of setting the political agenda for the next administration, a way of placing his imprint on the next administration," said Siller, the analysis chief at Banco Base.