Mexico: Risk Assessment
Country Risk Rating
Business Climate Rating
- Geographic proximity to the United States economy
- Membership of NAFTA and many other agreements
- Substantial industrial base
- Free-floating exchange rate
- Adequate foreign reserves level
- Large population and relatively low labor cost
- Supportive regulatory environment
- High dependence on the US economy; vulnerable to the ratification of the USMCA agreement (which replaces the NAFTA) by the US Congress
- High income disparities and rising criminality
- High corruption level
- Transport, health and education weaknesses
- Oil sector undermined by years of underinvestment
- High informality in job market
GDP growth should remain subdued in 2020
GDP registered a significant deceleration in 2019 mainly driven by the elevated uncertainty regarding the controversial measures of the new government and the still pending legislative ratification of the USMCA agreement by the United States and Canada (both issues have weighted on investments). In 2020, GDP growth should register some timid improvement, thanks to the expected agreement ratification and to some positive contribution from the ongoing easing monetary cycle (favoring somewhat credit market). Moreover, some increase in public expenditure and investments is also expected, as the negative government-transition effect fades (usually there is some delay in public expenditure in the first months of a new government). Once the USMCA is ratified and the easing monetary cycle reduces lending rates, some improvement in private investments should be observed. Besides, oil production has recently shown some stabilization (after 15 years in a row of contraction), a movement which, if persistent, will contribute positively to the mining output in 2020. Nevertheless, the scenario is not without risks. External headwinds could build up this year, the main one being a stronger than expected deceleration in the US. In this scenario, exports (mainly composed of automotive and ICT – notably electrical machinery and equipment) would be hit as well as household consumption (in case of a weaker US job market affecting remittances from Mexicans leaving abroad). Alongside, the impeachment process currently faced by the US President and the proximity to the November 2020 US presidential elections could compromise the USMCA ratification schedule.
Twin deficits continue well routed
Current account deficit narrowed in 2019, due to the improvement in non-oil trade balance surplus, as a weaker currency and a subdued domestic demand took a toll on imports. Alongside, the high oil trade deficit of roughly 1.9% of GDP (majorly composed by crude oil exports and oil derivatives imports) also marginally reduced. Moreover, while services deficit reduced of about 0.7% of GDP (thanks to higher travel and transport revenues), the historically high primary income deficit (of roughly 2.6% of GDP) continued to widen (due to higher interest paid and still high net dividends payment). Finally, remittances reached a new record high level. In 2020, current account deficit should however widen, as the expected loss of momentum of the US economy will tend to impact Mexican manufacturing exports as well as remittances from Mexicans living in the US (which represents roughly 2.8% of GDP). Despite that, foreign direct investments will remain sufficient to cover the current account deficit fully. Alongside, foreign currency reserves remain adequate (at 15% of GDP and covering roughly 5.7 months of imports). Regarding external debt, it represents around 37% of GDP (46% owed by the government and 48% by the non-financial private sector). Despite investors’ fear, fiscal policy remained prudent during AMLO’s first full year in office. In 2019, tax revenues disappointed amid weak growth, leading the government to use part of the oil stabilization fund. The execution of the 2020 budget may be challenging too, because it departs from very optimistic premises (it estimates GDP to grow by 2% in 2020 and oil production to reach 1.9 mbd in 2020, up from the current 1.7 mbd). Indeed, government´s efforts to revive the highly indebted state-owned oil company Pemex could derail fiscal consolidation, as the government may have to increase state aid if oil production failed to rebound. Finally, the expected deceleration of US GDP could also affect tax revenues in 2020.
Government faced with mounting violence-related challenges
Although some economic steps taken by the government of President Andrés Manuel López Obrador (AMLO) from the leftist Morena party have frightened investors (such as the cancelation of the construction of Mexico city´s airport), it has managed to keep its popularity relatively high during the first year in office. That is mainly because of some social policies and the anti-corruption and crime-fighting rhetoric. Concerning combat against violence, government has failed in curbing it. AMLO has insisted he will not “use violence to fight violence”, saying he prefers to concentrate on solving the “social” causes of violence and drug trafficking. Meanwhile, violence is escalating in the country and the number of murders in 2019 probably surpassed the record of 33,000 set in 2018.