Mexico: Risk Assessment
Country Risk Rating
Business Climate Rating
- Geographic proximity to the U.S. economy
- Membership of USMCA and many other agreements
- Substantial industrial base
- Free-floating exchange rate
- Adequate foreign exchange reserves
- Large population and relatively low labor cost
- High dependence on the U.S. economy
- High-income disparities and rising criminality
- High corruption level
- Weaknesses in transport, health, and education
- Narrow tax base, with tax revenues representing 21% of GDP
- Oil sector and PEMEX undermined by years of underinvestment
- High informality in the job market
- Weak sovereign fund
Activity will resume weakly in 2021
COVID-19 strongly affected the economy, leading it into a deep recession. Despite the poor evolution of COVID-19 in the country, the government announced plans to begin the normalization of economic activities in May 2020. However, the gradual reopening was not without mishaps (due to the resurgence of the outbreak), forcing some states to restrict non-essential activities again in November 2020. Because of the negative shock caused by the COVID-19 outbreak and the very limited stimuli measures implemented (0.7% of GDP), Mexico´s GDP was among the most impacted in Latin America. The economy should rebound only partially in 2021. Household consumption is expected to improve, helped by the slow recovery on the job market, a still accommodative monetary policy (a cut of 4 basis points has been implemented since August 2019), and higher remittances from the U.S. (in line with an improvement on the U.S. job market). Concomitantly, the economic resumption in the U.S. will favor Mexican manufacturing exports. Conversely, the poor economic rebound and the government’s controversial policies will prevent gross fixed investments from gaining strong growth momentum. Downside risks are related to the evolution of COVID-19 in the country and in the U.S. Finally, while the recent accession of the Democrat Joe Biden to the U.S. presidency should imply a less aggressive stance on U.S. trade policy, risks will remain. This is underpinned by the fact that his Democratic party may push for stricter compliance or tighter labor and environmental laws within the USCMA agreement.
External and public accounts withstood relatively well thanks to low stimuli
The current account deficit switched to a light surplus in 2020, supported by a higher trade surplus, as imports observed a deeper slide than exports (with the U.S. economy recovering faster than that of Mexico), and a lower primary account deficit (due to lower profits registered and repatriated by foreign companies). These movements outpaced the deterioration in services accounts because of lower tourism. Concomitantly, despite the rise in the U.S. unemployment rate, remittances (equivalent to roughly 3% of GDP in 2019) also proved more resilient than initially expected. In 2021, the current account deficit will remain broadly balanced. The trade balance will remain in surplus and, assuming stronger tourism by the end of 2021, the services deficit could be relatively lower. Additionally, although FDI is likely to increase from the 2020 level, it will remain subdued amid still weak domestic activity and erratic microeconomic policies. Regarding the external debt, its part owned by the public sector reached 21.8% of GDP in September 2020 (from 15.9% in end of 2019), while its private part stood at 21.7% of GDP in June 2020 (from 17.4% of GDP in 2019). Finally, foreign exchange reserves stood at USD 200 billion in October 2020, covering over 6 months of imports.
Concerning the public account, the fiscal deficit deteriorated moderately in 2020 due to lower tax revenues because of the deep economic recession. This outcome came in a context of timid fiscal stimuli and with oil hedge smoothing the impact of lower oil prices, as well as drawdowns from rainy-day funds. However, gross public debt as a percentage of GDP registered a strong increase, also affected by a lower base effect (as GDP collapsed). This year, the nominal deficit should remain at a similar level, despite the government’s estimate at 2.9% of GDP (due to its very optimistic GDP growth estimate of 4.6%). The 2021 budget also includes resources for the Mayan train (0.2% of GDP), the new airport serving Mexico City (0.1% of GDP), and capital transfer to PEMEX (0.2% of GDP) to continue with the construction of the Dos Bocas refinery.
Corruption scandals can influence the 2021 mid-term election
Corruption is an old ailment that has gained momentum in recent months after Emilio Lozoya, the former boss of the state oil company Pemex during the Enrique Pena Nieto (2012-2018) government, was extradited from Spain in July 2020 to face corruption charges in Mexico. He has been accused of taking bribes from a Brazilian construction firm. In a declaration to prosecutors, Lozoya raised corruption charges against more than a dozen former and current politicians (including three ex-presidents). The most notable case refers to the 2013 energy reform that opened the local oil sector to private companies and of which President Andrés Manuel López Obrador (AMLO) is a fierce critic. President AMLO has tried to capitalize on this corruption scandal to improve the ruling National Regeneration Movement party’s (MORENA) outcome in the June 2021 mid-term elections. Furthermore, if MORENA succeeds in increasing its representation in Congress after the mid-term elections, AMLO may try to roll back the energy reform (a two-thirds majority in Congress is required), hurting investors’ confidence in the economy. In the meantime, AMLO will also have to dodge an obstacle: two videos made public after Lozoya’s accusation allegedly showed his brother, Pío López, receiving illegal campaign financing in 2015. AMLO has denied that the payments his brother received were corrupt, but said that the Attorney General’s Office should investigate them regardless.