Mexico: Risk Assessment
Country Risk Rating
Business Climate Rating
- Geographic proximity to the North American economy
- Membership of NAFTA, OECD, the G20 and the Pacific Alliance
- Substantial industrial base
- Recent improvement in fiscal position
- High dependence on the United States economy; vulnerable to changes in the NAFTA agreement
- Rising criminality rate
- Infrastructure and education weaknesses
- Oil sector undermined by years of underinvestment
Continued subdued growth in 2018
As in 2017, economic activity is likely to remain subdued in 2018. In 2017, GDP growth contracted in the third quarter (the weakest outcome since the fourth quarter of 2015), partly due to the effects of the damages caused by the two major earthquakes that hit Mexico City and nine of the country’s states. Oil activity and services were particularly affected. In 2018, activity is expected to benefit from reconstruction work and by the generally positive fundamentals of domestic demand. The latter should be driven by a relatively strong job market and by the expected deceleration of inflation (6.4% in 12 months accumulated until October 2017). Moreover, manufacturing output has also benefited from a strong US industrial activity.
However, some downside risks will weigh on activity. Investment growth is set to remain weak, due to the pending presidential elections and the doubts brought by the extension of the NAFTA renegotiation talks (to be concluded in early 2018). Despite the difficulties of reaching an agreement, the most likely scenario is that NAFTA will make only small changes to the current treaty. Monetary policy is expected to ease once uncertainties regarding the Mexican economy have ceased (probably during the second half of 2018).
Budget deficit is expected to remain sustainable
Fiscal policy has remained prudent, despite the slump in oil prices. Oil revenues account for roughly a third of government revenue. As such, the drop in its prices has prompted a tightening of the fiscal policy that has been well executed. Fiscal deficit improved to 2.6% of GDP in 2016, from 3.5% in 2015, and is set to reach 1.5% of GDP by the end of 2017 at the time of writing. As recognition of the efforts done, Standard & Poors raised its outlook on Mexico’s credit rating to stable from negative, arguing that it doesn’t expect a material worsening in the country’s debt levels. They praised Mexico’s prompt reaction to recent negative shocks, such as the depreciation of the currency in late 2016. They expect the country to be able to diminish the rapid pace of debt accumulation seen in previous years, helping to stabilize the government’s debt burden.
Presidential elections will ensure a heated political environment in the first half of 2018
Mexico will hold presidential elections in July 2018. Mexicans will have to choose the successor of unpopular President Enrique Peña Nieto (Institutional Revolutionary Party, PRI). After taking office in December 2012, President Peña Nieto signed an agreement with the two main opposition parties (PAN and PRD) to promote political cooperation. Called the “Pact of Mexico”, the agreement allowed the government to pass an ambitious constitutional reform agenda, including reforms for both energy and telecommunications. The reforms aimed to substantially boost the potential GDP. However, the results have been disappointing, and the GDP annual growth rate is expected to average at only 2.3% during President Peña Nieto’s five-year term.
However, the president’s feeble popularity is not only related to sluggish activity: the population is angry about widespread corruption and rising violence. The extension of the NAFTA talks may also disturb the PRI’s presidential campaign in 2018. This scenario creates opportunities for non-traditional candidates in the presidential elections. Although candidates have not yet been officially confirmed, late 2017 polls portray left-wing populist candidate Andrés Manuel López Obrador (MORENA party), also known as ALMO, as the frontrunner. In addition, the candidate Margarita Zavala resigned from the PAN after 35 years to run as an independent. This decision may split the PAN votes and, as the country does not have run-off, a more divided center-right could benefit AMLO. However, a tactical vote cannot be ruled out: voters may choose to support the candidate who has the best chance of beating AMLO.