The country’s debt (external and internal), due to its level and cost, is one of the time bombs that the authorities will have to deactivate in the next six-year term, since it will be a long-term factor that will remain pending.
A little over a year after the end of the present administration and within the framework of the fifth government reportthe truth is that debt management has not been very different from that observed in other administrations. It is worth noting the fact that there were no excessive or irresponsible debts, although the same can be said of other periods. During the administration, attempts have also been made to refinance as much as possible to improve maturity profiles and financial conditions in accordance with what lasts in the markets, another strategy that dates back to several federal administrations.
The fact is that the country’s total debt will be a heavy burden for the next administration, whatever color it is, its high cost and the level it is at makes this factor a time bomb that must be deactivated.
Although it sounds commonplace, exploring options such as tax increases or tax reform becomes more and more likely. Obviously, the first factor mentioned is almost impossible, especially in an election year, but tax reform also seems complicated unless one of the political forces that will compete in 2024 overwhelms and completely dominates not only the country’s presidency, but also Congress, to carry out the necessary changes, if you want it and it suits you.
Total debt rises 40% in the six-year term
According to figures from the Superior Audit Office of the Federation (ASF), at the close of the first half of the year, The total debt during the six-year term rose practically 40 percent, going from 8,315 trillion pesos at the end of 2018 when the current authorities took office, to 11,629 trillion pesos on December 31, 2022. This is equivalent to an increase of 3.314 billion pesos, or 39.85 percent.
Of the total debt, 80.78 percent corresponds to internal debt, that is to say around 9.395 trillion pesos, while the remaining 19.22 percent, that is to say 2.234 trillion pesos corresponds to external debt, it is essentially a photograph practically identical to the one reported at the end of the past six-year term.
But in the total cost of debt, the figures are worse. According to the same ASF, a body dependent on the Chamber of Deputies, the total cost of the debt increased substantially.
According to these official figures, since they are derived from information from sources of the Ministry of Finance, the Total financial cost of the public debt of the federal government increased 55.3 percent in an amount of 237 thousand 384 million pesos; Thus, the financial cost went from 428 thousand 929 million pesos at the end of 2018, to a figure of 666 thousand 313 million pesos in December 2022.
Of course, due to the proportion between internal and external public debt, in which the former is much higher, the amount of the cost paid is also higher for internal debt.
Thus, according to official figures so far this six-year term, 565 thousand 932 million pesos have been paid to service the internal debt, that is, 84.93 percent of the total, while the remaining 100 thousand 381 million pesos They were used to pay the service of the external debt.
The determining factor for this increase in the cost of the total public debt of Mexico has to do with the performance of local interest rates, at the beginning of the administration, the average level of rates was located at 5.5 percent, while currently it is practically 600 basis points up at 11.25 percent.
The impact of interest rates is evident when observing factors: despite the performance of the effective exchange rate, which decreased due to the strength of the peso; that is to say, our currency appreciated and the value of the dollar deteriorated, which led to a realization of financial payments for the external debt of up to 10.0 percent this year.
However, the cost of the debt rose despite the fact that the gross external debt of the federal public sector also averaged a lower balance of 1.07 percent during the first five months of 2023, standing at 221 thousand 803.1 million pesos, compared to a year ago, and 17.02 percent less real, measured in pesos.
But the impact of interest rates on our country’s cost of debt was “brutal”, to put it mildly. In the first five months of 2023, the average rate for financing in dollars was 4.86 percent, multiplying by 10 compared to the average for the period January-May 2022, when it was 0.47 percent.
How has it been for us with the cost of internal debt, that is, in pesos, during the current year? The news is not better, in reality the performance is very similar to what happened with the cost linked to the internal.
Sothe financial cost of the internal debt of the federal public sector shot up much more in the analysis period, to a real rate of 75.6 percentequivalent to 231 thousand 512.1 million pesos.
The cause is evident, in addition to having registered a real increase of 5.9 percent in the average balance, which is added to the increase in the interest rate of the Bank of Mexico (Banxico), which was located at an average of 10.97 percent, against the average level of 6.15 percent registered a year earlier.
The effects will continue, even if rates fall
In this context, what many might think is that if rates fall, the impact on the cost of the total debt of our country would begin to subside and eventually less would be paid.
The first factor that does not play in our favor is that interest rates in our country are not going to drop in the short term, nor will it happen in the United States, our main reference, for the remainder of the year they will remain at current levels and it is very likely that at least the first quarter of the year continue in the same vein.
But there is something else: those who know the mechanisms of the public debt and its payment, point out that the cumulative effect of the rise in interest rates takes time to materialize in a higher financial cost, due to the fact that the debt is refinanced as the bonds mature. That is why, and with it, the conditions of the debt are changing. The full impact of the rate adjustment is usually reflected 18 months or 24 months after they stopped adjusting and began to decline.which means that the pressures on the public debt of our country, in terms of its cost, will remain in force at least until 2025.
However, after the pressures wear off and interest rates drop, a “honeymoon” will not come. By then, or since before, the Mexican authorities that are in office, of whatever color they may be, will have to start a process that will really lead the country now to a net deleveraging and, therefore, a lower financial cost with the passage of over the years, if they really think about the next generations of Mexicans, who will be in charge of dealing with this problem and seeking to defuse that bomb that our generations could not, if it has not exploded by then.
MORE NEWS: