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
Activity Accelerated in Q1 2018; Further Momentum is Unlikely
GDP grew by 2% in 2017 and accelerated to 2.3% year-on-year in Q1 2018. This upturn in activity was observed despite a tight monetary policy (policy rate stands at 7.75% per annum), and the uncertainties related to both the presidential elections and the NAFTA renegotiation. The relatively higher outcome in the first quarter of the year was supported by consumption and investments. The former was driven by the impact of decelerating inflation over real wages and by solid remittances from expatriates in the US, while the latter was mainly related to reconstruction works following the earthquakes of September 2017.
Nonetheless, activity might marginally decelerate in the upcoming quarters. According to preliminary figures for the second quarter, seasonally adjusted GDP proxy rose by 1.4% year-on-year in April 2018, down from 2.4% in the previous month and 2.3% in February 2018. On the one hand, robust activity in the United States should continue to support high remittances and a strong demand for Mexican manufactured goods. Moreover, household consumption could also benefit from the intention of the recently elected president Andrés Manuel López Obrador (AMLO) to double minimum wage by 2024. A measure that is, however, easier said than done. On the other hand, reconstruction works should lose strength in the months ahead and the Nafta renegotiation is not expected to be concluded anytime soon. In fact, more recently US president Donald Trump has raised its protectionist rhetoric.
Manageable Twin Deficits
Mexico´s current deficit narrowed in the year 2017, driven by higher non-energy trade surplus and smaller income deficit (lower profit repatriation from foreign firms). It dropped from 2.1% of GDP in 2016 to 1.6% in 2017 and further shrunk to 1.3% in Q1 2018. This current account deficit remains comfortably covered by foreign direct investments (1.8% of GDP in 12 - month cumulative until March 2018). It is worth, however, noting, that FDI flows shrunk to 2.2% of GDP in Q4 2017 from 2.7% a year earlier. The uncertainties related to elections and to the Nafta must have taken a toll on foreign investments in the country.
In the meantime, the fiscal policy has remained prudent. Oil revenues account for roughly a third of government ´s revenue. As such, the drop in oil prices has prompted a tightening of the fiscal policy that has been well executed. Fiscal deficit improved to 1.1% of GDP in 2017, from 2.5% of GDP in 2016 and 3.4% in 2015. In 2018, it is however expected to deteriorate somewhat, driven by the higher public expenses related to the reconstruction works following the earthquakes. Nevertheless, the latter is not expected to considerably impact the reduction of the government’s debt burden.
Leftist Candidate Scores Landslide Victory in Presidential Elections
On the 1st July 2018, leftist contender Andrés Manuel López Obrador (AMLO) from the Morena party won the presidential election race with 53% of the votes, defeating Ricardo Anaya of the PAN party and José Antonio Meade of the ruling PRI party. In parallel, according to preliminary figures, AMLO’s “Together We Will Make History” coalition assured a majority in Congress. AMLO’s victory represents the end of Mexico’s long-lasting two-party hegemony between the PRI and the PAN party. His landslide victory was mainly credited to the environment of general dissatisfaction with the political class, amid several corruption scandals, as well as to climbing violence in the country.
Although AMLO has been associated with populism – in the past, he positioned himself against the NAFTA agreement, privatizations (notably in the energy sector in late 2013), and the trade opening of Mexico – he has more recently softened his rhetoric. In his victory speech in early July, AMLO pledged to respect contracts, central bank independence, and fiscal discipline. His Finance Minister, Carlos Urzúa, has promised to keep a primary surplus enough to stabilize the current debt level. In addition, the new government has promised to increase public investments and social programmes without raising taxes, with the necessary resources coming from reduced tax evasion and corruption. However, it seems overly optimistic to believe that the government will be able to balance higher public expenses solely via these two measures. Mr. Urzúa has said that extra public expenditure would be halted if the corresponding resources are unavailable. Last but not least, concerning the Nafta renegotiation AMLO said he would work to keep Mexico in the NAFTA and seek a frank and friendly dialogue with the United States.