“Targetazo” in Mexico: Government aid boosts credit and consumption | Economy

National holidays on the weekend left the largest economic impact seen in these celebrations since Andrés Manuel López Obrador took power in December 2018. This is partly because the financial aid that the federal government transfers to some segments of the population consumes. And with it the use of credit cards.

According to the Federation of National Chambers of Commerce,…

National holidays on the weekend left the largest economic impact seen in these celebrations since Andrés Manuel López Obrador took power in December 2018. This is partly because the financial aid that the federal government transfers to some segments of the population consumes. And with it the use of credit cards.

According to the National Confederation of Chambers of Commerce, Services and Tourism (Concanaco Servytur), the country’s independence celebrations, which were celebrated on the night of Friday, September 15 (and in many cases ended until Sunday), generated a sensation. The value of economic activity reached 23,000 million pesos, the highest level seen at this time, at least so far in the López Obrador administration. Mexico City alone welcomed 105,408 visitors, both national and foreign, pumping 7,797 million pesos into the local economy in one weekend.

The same thing has happened so far this year during the country’s most important celebrations, such as Mother’s Day in May, which is explained by increased consumption encouraged by government social programs, explains Gabriela Siler, economist and director of analysis. At Banco base.

“Consumption in Mexico has benefited from the lower unemployment rate, the increase in wages, which combined to increase the real wage bill and transfers provided by the government,” explains Siler, who is also a professor from the University of Tec de Monterrey. . One of the country’s most important sources of foreign currency is remittances sent by citizens in the United States to their relatives in Mexico, but these have witnessed a loss of purchasing power, as they are sent in dollars and the exchange rate. With the Mexican peso having appreciated by 10% so far this year.

What compensates for the reduced purchasing power of remittances? “The expectation is that remittances will increase next year, which has led to an increase in the granting of credit,” says Siler. The president himself has announced these increases, as on August 22, when he said in a press conference that elderly pensions would increase by 25% next year. There are also direct transfer programs for youth, parents and farmers.

Figures from the Bank of Mexico confirm the tendency of Mexicans to give out more and more “big cards” for spending. In July, credit card payments worth P702.4 million were recorded, the highest level so far this year. This has happened despite interest rates reaching historic highs, with the financial system using the central bank rate as a reference, which currently stands at 11.25%. The next major peak in consumption is expected to occur between November 17 and 20, when the nationwide show weekend called “Buen Fin” takes place.

Mexicans tend not to respond to increases in interest rates, Siler says. He also points out that “there is not a lot of financial literacy, and they do not notice the high interest rates that they pay. If remittances were to increase by 25%, that is, an interest rate of 11% per year, then 25% would go up.” Increase “pensions sufficient to cover future expenses.” The Ministry of Finance presented its proposal for the 2024 budget, which includes spending on social transfers at approximately 13% of (Gross Domestic Product), a level that the Minister herself described as “unprecedented.” To achieve this, debt will rise until it reaches 48.8% of GDP.

In April, the Treasury Secretary said in a lecture at the Autonomous University of Mexico that private consumption contributes 70% to the post-pandemic economic recovery, which is why the economy is growing more than expected. Both the agency and the average forecast among analysts suggest that GDP will grow beyond 3% this year.

“Consumption is the internal engine of growth,” says Siler, “but it is only short-term growth. Growth should be the result of productive investment, that is, greater total fixed investment. Increasing consumption through remittances is like a car that runs, but because you drive it.” “You can’t keep pushing all your life.”

Siler and other analysts warned of the risk that Lopez Obrador’s social transfers would become unsustainable and that the next administration might have to adopt a tax reform that raises revenues to pay pensions. “Next year, we could achieve growth of 2% to 2.5%, but if such a large deficit occurs, it is very likely that in 2025 the rating agencies will downgrade the rating or lower the forecast,” says Seiler. From stable to negative, this may put more pressure on the Mexican government to implement financial reform, which would lead to economic growth of less than 1% in 2025.

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