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The Mexican Ministry of Finance (SHCP) has proposed raising mining royalties in the 2025 federal budget bill. The proposal suggests increasing two key taxes on mining activities, which is at a risk to the sector and the country's economy.

What Happened? The SHCP plans to raise the special tax on mining profits from 7.5% to 8.5% and the extraordinary tax on revenues from the sale of gold, silver, and platinum from 0.5% to 1%. The Ministry justifies the hike by citing rising global metal prices and the nature of those assets.

"Considering that minerals and substances from the subsoil are non-renewable public domain assets, it is proposed to increase the special and extraordinary rights on mining," the SHCP stated in the bill per bnamericas. The Ministry projects that the additional revenues will be allocated to government programs and projects, though specific details were not disclosed.

In 2021, an International Monetary Fund working paper by Alpha Shah explored Mexico's mining tax regime, concluding it was less burdensome than in many comparable nations. Shah's findings pointed out that there is room to increase the overall tax burden on mining while still maintaining competitiveness. The paper suggested a balanced redesign to boost the government's share of resource rents while ensuring the sector remains an attractive investment destination.

Why It Matters? Mining is important to Mexico's economy, contributing 2.5% to GDP and supporting 400,000 direct jobs. The country is the world's leading silver producer and a major supplier of gold and copper. However, with increasing global competition, Mexico could struggle to attract new investments under a higher tax regime.

The country needs significant investment to bolster its mining sector, which has already seen declining fiscal contributions. These contributions fell 32% in 2023, further underlining the need for a balanced approach to taxation. Furthermore, bnamericas noted that industry experts warned the proposed increases could discourage nearly $7 billion in mining investments by 2025, particularly as companies face other challenges, such as reduced concession terms and stricter water-use permits.

While the proposed taxes aim to capture more value from the mining sector, they may also reduce Mexico's appeal compared to peers like Chile, Peru, and Canada. These countries offer competitive tax regimes and have become increasingly attractive destinations for mining investment.

Read Next:

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The S&P/ASX 200 is trading at 8388 at the time of writing and is tracking very nicely to close at a new record high today. Things have literally never been so good for Aussie investors. It could be argued these are the main reasons for recent share price strength:

1. China Stimulus

In September, Beijing announced the first of several initiatives to boost the Chinese economy. These, and further promised measures to come, are aimed at boosting consumption, reversing the slide in property prices, and alleviating the burden on heavily indebted local governments and property developers. A strong Chinese economy is generally expected to benefit economic growth here and around the world.

2. The Trump Trade

The Trump + Red Sweep in the recent US elections provided a nice bump for several key S&P/ASX 200 index constituents, particularly those with substantial US earnings, but Aussie banks have also hitched a ride on US bank stocks that are seen as major beneficiaries. US fiscal policy is expected to be expansionary moving forward, and despite the threat of a potential trade war between the US and China, the US presidential result is generally considered to be the most positive of the potential outcomes for the global economy.

3. No Landing Scenario

More generally, there is a growing feeling among economists and research analysts that we’re in for a ‘no landing’ scenario, that is, the economic rebound from after the COVID-19 pandemic largely continues despite central banks running higher interest rates to combat the inflation that it caused. Further, rates are now generally being dialled down from restrictive settings in most economies, and this could help sustain global economic growth even further.

How 2025 is shaping up for the Aussie economy

In a research note released earlier this week, Morgan Stanley predicted that global economic growth would be a healthy 3% in 2025, with the USA driving “the bulk of it”. In 2025, global growth will slow (from 3.2% in 2024) “but not be derailed” the broker said.

Turning closer to home, Morgan Stanley predicts that 2025 will also be a sound growth period for the Australian economy with tailwinds from fiscal spending in the lead-up to the next Federal election, a strong employment market, and modest interest rate cuts from the RBA likely beginning in May.

So for 2025 we hold off on calling the Australian landing just yet.

––Morgan Stanley, 2025 Australia Macro+ Outlook

Resources could be 2025’s big winners

On the topic of China, Morgan Stanley notes it could be a net-flat result in 2025 as Beijing aims to mitigate the negative impact of new US tariffs by ramping up its own economic stimulus measures.

If this scenario plays out, Australian resources companies could be big winners, notes the broker. Morgan Stanley describes its exposure to Australian resources companies as “quite spread”, but that it favours the large, diversified miners, gold, and energy stocks (including uranium).

Morgan Stanley presently has OVERWEIGHT ratings (its highest conviction rating) on large, diversified miners BHP Group , Rio Tinto , and Mineral Resources . It also likes Nickel Industries (nickel exposure only). In energy it likes Whitehaven Coal and Paladin Energy (uranium).

Other areas of the Australian stock market Morgan Stanley would be “Overweight” in 2025 include telecommunications, infrastructure and utilities, real estate, and health care. It prefers to be “Underweight” sectors like financials (banks, insurance and diversified financials), industrials and transport, consumer-related, and housing linked.

Exhibit 18: MS Australia Macro+ Model Portfolio Sector Skews - overweight Defensive Industrials through Telcos, Infra and Utilities. Energy remains our preferred exposure in Resources, whilst holding active underweight in Banks. Source: Bloomberg, Morgan Stanley Research. Data as at November 13, 2024. (From: “2025 Australia Macro+ Outlook, It's Tricky...”, Morgan Stanley Research, November 18 2024) (click here for full size image)

Further (modest) upside for Australian stocks in 2025

S&P/ASX 200 price chart

Morgan Stanley notes Aussie stocks have exceeded its forecast in 2024 but without delivering on the earnings growth the broker had forecast at the start of the year. Their original 2024 S&P/ASX 200 target was 8,100, but it’s nearly 300 points or roughly 4% higher than that today. The Australian stock market missed its earnings growth expectations by around 13% this year, concludes Morgan Stanley.

But the good news is it should make this up to a large extent in 2025 due to the factors mentioned above. Morgan Stanley tips S&P/ASX 200 companies will grow their earnings by around 10% in 2025, helping the benchmark index to reach the broker’s 8,500 end-of-year target.

It’s important to remember that targets like these are made on an ex-dividend basis. As stocks pay dividends, their share price falls. So, whilst Morgan Stanley’s 2025 target sounds like slim pickings, one should add in the 4.2% dividend yield also forecast. The total shareholder return (“TSR”) forecast for Aussie stocks in 2025 is therefore closer to 5.5%.

This would be a moderately below-average performance if it were to come to fruition, given the average annual TSR for the S&P/ASX200 over the last 20 years closer to 9.6%.

S&P/ASX 200 Total Shareholder Return ("TSR") Since 2000 (click here for full size image)