According to a UBS report, Mexico is facing a structural low-growth equilibrium, where rigid fiscal spending and infrastructure bottlenecks are limiting the broader gains from nearshoring and high-tech manufacturing. While technology exports continue to expand, overall economic momentum remains constrained by weak productivity and a rising debt-to-GDP ratio, driven by mandatory social spending and Pemex-related liabilities. Combined with policy uncertainty ahead of the upcoming USMCA review, these fiscal pressures underscore the need for structural reforms to support sovereign credit stability and attract sustained long-term investment.

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Mexico is projected to remain the slowest-growing major economy in Latin America, according to a report from the UBS Chief Investment Office. Despite a resilient export sector and prudent monetary policy, the country continues to face persistent structural constraints, including weak productivity, low investment, and ongoing policy uncertainty. While the federal government remains committed to fiscal consolidation, rigid spending dynamics and limited revenue capacity are complicating the achievement of deficit reduction targets.

According to the report, Mexico’s macroeconomic position is broadly stable, supported by solid external accounts and a flexible exchange rate. However, this stability coexists with acute fiscal constraints and a low-growth equilibrium. UBS analysts note that without a significant reform impulse or a meaningful rebound in investment, the current economic trajectory is likely to persist.

Structural Barriers to Economic Momentum

The report highlights that Mexico’s economy avoided a recession in 2025, primarily due to strong external-sector performance. Annual growth slowed to 0.6% in 2025, down from 1.4% in 2024, reflecting a significant contraction in investment and weaker domestic demand. Investment was particularly affected by reduced public infrastructure spending and uncertainty surrounding the United States-Mexico-Canada Agreement (USMCA) review, as well as domestic institutional reforms.

External-sector strength has been highly concentrated in technology-related manufacturing. While traditional exports such as oil, agriculture, and automobiles underperformed, non-automotive manufacturing exports surged. This growth was driven by a sharp expansion in technology goods, including data servers, semiconductors, and electronic components. This shift indicates that Mexico is becoming more integrated into global high-tech supply chains as an assembly hub for artificial intelligence infrastructure.

Despite the rise in technology exports, the report notes that the domestic economic impact remains limited. These assembly operations rely heavily on imported inputs, resulting in lower domestic value added and limited spillovers to the broader economy. Nearshoring presents a significant opportunity, but potential gains are constrained by governance frictions and infrastructure bottlenecks, particularly in energy and water supply.

UBS expects a modest recovery in growth to 1.4% in 2026, supported by easing monetary headwinds and temporary tailwinds from the World Cup. However, risks remain skewed to the downside. Structural growth challenges persist due to weak productivity and a subdued investment environment.

Fiscal Consolidation and Debt Affordability

The report also notes that Mexico has made progress in fiscal consolidation after the headline deficit (Public Sector Borrowing Requirements) widened to 5.7% of GDP in 2024. The deficit narrowed to 4.8% in 2025, primarily through reduced capital expenditure. The government’s target for 2026 is a deficit of 4.1%, but achieving this goal is becoming increasingly difficult due to rigid expenditure patterns.

Rigidities are most evident on the expenditure side, where mandatory spending on pensions and social programs continues to rise. These transfers, some now constitutionally embedded, account for almost half of programmable expenditure. Operating spending has already been compressed, leaving limited room for further adjustment. As a result, additional consolidation may fall disproportionately on investment, with implications for medium-term growth.

State-owned enterprises add complexity to the fiscal outlook, with PEMEX transitioning from a net contributor to a structural liability. Ongoing financial support is expected to remain necessary, with debt servicing increasingly absorbed by the sovereign balance sheet. The Ministry of Finance expects the debt-to-GDP ratio to reach 54.7% in 2026 and 55.0% in 2027. While these levels remain manageable compared to peers, the upward trajectory is a key variable for investors.

Debt affordability is deteriorating, as interest payments now absorb approximately 17% of government revenues. This sensitivity to financial conditions further limits fiscal flexibility. Markets are also focused on a pending sovereign rating review from Moody’s. A downgrade with a negative outlook would signal unresolved risks regarding fiscal consolidation and the burden of PEMEX.

Investment Implications

The report argues that the Mexican peso maintains an attractive risk-adjusted profile, supported by carry advantages and solid fundamentals. The currency’s performance is driven largely by global risk sentiment and US dollar dynamics. UBS forecasts the peso at MX$17.7 per US$1 in 2Q26, and MX$17.2 per US$1 in both 4Q26 and 1Q27. Upside potential may be limited by a more dovish stance from Banco de México (Banxico) and lingering uncertainty surrounding the USMCA review.

UBS notes that Mexico’s US dollar-denominated sovereign bonds trade at a modest discount to investment-grade peers. The absence of planned sovereign issuance to fund PEMEX should provide modest support to spreads. On the corporate side, many Mexican companies are large, geographically diversified, and well-capitalized, with proven resilience through economic cycles and policy shifts.

Mexican equities are expected to benefit gradually from improving external conditions. US-China trade tensions continue to reinforce Mexico’s role in North American manufacturing supply chains. However, with growth constraints and fiscal space tightening, Mexico is likely to remain in a low-growth equilibrium unless investment meaningfully recovers, the report concludes.