Latin America Advisor

A Daily Publication of The Dialogue

What Forces Are Shaping Mexico’s Economic Outlook?

File Photo: Mexican Government. File Photo: Mexican Government.

Goldman Sachs last month cut its annual economic growth forecasts for key Latin American countries, with Mexico’s economy now expected to grow by 1.5 percent instead of 1.7 percent. The figure is the lowest rate of growth predicted this year among major regional economies covered by the Wall Street bank. What factors are shaping Mexico’s economic outlook this year? How much do lowered forecasts have to do with political variables and uncertainty under a new president versus economic trends? Where is the peso currency headed, and what actions might Mexico’s central bank take in the months ahead?

Jaana Remes, member of the Advisor board and partner at the McKinsey Global Institute: “Economic forecasts from Goldman Sachs to the International Monetary Fund suggest Mexico’s growth will disappoint this year—again. In January, the IMF cut its 2019 forecast to 2.1 percent, down 0.4 percent from October 2018, and its forecast for 2020 to 2.2 percent, 0.5 percent lower. That is against an expected world average GDP growth rate of 3.5 percent in 2019 and 3.6 percent in 2020. The Achilles’ heel for Mexico is weak productivity growth. Fully 70 percent of Mexico’s GDP growth since 1990 has come from an expanding pool of workers, and only 30 percent from higher productivity. As expansion in the working-age population declines, Mexico’s growth will depend even more on raising the productivity of each worker. What is Mexico’s core productivity problem? The answer is a ‘missing middle’ of firms and consumers. It lacks sufficient modern, globally competitive firms offering high-wage employment that could boost citizens’ purchasing power and fuel consumption. Disappointingly, growth in employment continues to come mostly from less productive parts of industry. The few large, productive companies are not creating jobs fast enough to absorb workers from small, unproductive and often informal businesses. Over past decades, Mexico has progressed slowly but surely through multiple political transitions and the economic headwinds following the 2007 recession. Its opening up to trade and foreign investment, successful integration of its automotive and aerospace industries in North American value chains, and much improved macroeconomic and fiscal stability are solid foundations for the future. Mexico’s challenge continues to be broadening the pool of modern companies and reigniting domestic demand growth that can create a virtuous growth cycle.”

Alfredo Coutiño, director for Latin America at Moody’s Analytics: “In 2019, the economy is facing two unfavorable factors: the curse of the first year of each new administration and uncertainty regarding the direction of policymaking with the new government. The country is also subject to the external risk coming from a potential deceleration of the global economy, particularly in the United States. In the first case, Mexico’s economy is facing the slowdown typical of the first year of each new government: the deceleration phase of the political cycle. In the past 24 years, the political transition has always introduced a delay in the execution of the federal budget, which has also delayed private decisions of investment. This deceleration phase extends until the middle of the first year, and the economy starts to gain traction when the federal budget normalizes in the second half of the year. The second factor has to do with actions the new government took even before taking office, which introduced uncertainty and affected investor sentiment. Among those measures are the cancellation of the new airport in Mexico City, the reversal of the education reform and revisions of oil contracts already granted to private companies. All this has awakened a sentiment about potential measures that could threaten investment and property rights. In this regard, the deterioration of Mexico’s economic prospects has to do more with domestic factors and less with external tailwinds. If the new leftist government implements measures that directly affect investors or actions that could put macroeconomic discipline at risk, financial markets will be shaken strongly, investment will fall and the economy’s performance will be even worse this year. Under this scenario, the central bank will be left with no option other than turning to more restrictive monetary policy in order to restore stability. Unfortunately, once again, the economy has not been able to escape the curse of the first year’s deceleration.”

Amanda Mattingly, senior director at The Arkin Group in New York: “The financial institutions and the larger business community have been concerned about a softening Mexican economy ever since President Andrés Manuel López Obrador was elected last July. While it seemed López Obrador might have turned over a pragmatic leaf in giving his tacit blessing to the re-negotiated NAFTA deal, he is at heart a leftist and a nationalist skeptical of corporate interests. Recall that he was willing to throw out the $13 billion airport project, much to the dismay of the corporate community and the Mexican peso, which experienced volatility immediately following the decision. Since López Obrador was elected, Mexico’s economy has slowed. Industrial output decreased, and services slowed in the fourth quarter of 2018. Oil production fell 6.9 percent last year to 1.8 million barrels per day, leading the rating agencies to downgrade Pemex in January upon hearing this news. Complicating matters further, López Obrador recently announced an end to oil joint ventures between private companies and the state-owned Pemex—the hallmark of the 2013 energy reforms. Another variable is the U.S. economy, given that the two economies are inextricably linked. The combined effect has left economists less than optimistic, and they have lowered their forecasts for Mexico in 2019 as a result. The decline in industrial output, services and oil production did not happen entirely on López Obrador’s watch, but his current policies and political rhetoric are not helping to assuage jittery investors or to build confidence in the Mexican economy. In fact, they are doing the opposite.”

Amy Glover, CEO for Mexico at Speyside Corporate Relations: “The main factor influencing the Mexican economy at this moment is uncertainty. Despite the long transition, the government of Andrés Manuel López Obrador has taken time to coalesce, and with an approval rating of approximately 80 percent, the government is concentrating on its core social mission. His popularity means that the views of the private sector—and certainly foreign investors—have taken a back seat on the list of priorities. AMLO sees the domestic economy as separate from global economic dynamics and has taken personally the fact that rating agencies like Fitch have called into question the financial health of Pemex and the economic vibrancy of the country (S&P recently downgraded long-term growth prospects from stable to negative). The uncertainty related to the U.S. economy certainly does not help Mexico. Elevated political risk in Washington and President Trump’s protectionism have done nothing to encourage greater economic growth globally. When the U.S. economy slows down as the year progresses, Mexico’s economy will follow suit given the strong interdependence. As long as there are no negative short-term surprises, the peso will continue to trade in the range of 19 pesos to the dollar in the coming months. Despite mixed signals on the public policy front, there is still significant interest in the Mexican market coming from technology companies and consumer-focused startups. Mexico’s economy still has a lot to gain from efficiencies related to the introduction of new technologies, and while this could potentially mean the loss of some manufacturing jobs, it could also introduce greater dynamism, innovation and productivity.”

Alma Caballero, director for Mexico at McLarty Associates: “Mexico’s economic outlook for 2019 is conditioned by the level of uncertainty surrounding the lack of clarity over the economic policies that the López Obrador administration will pursue. External factors that strongly influence the future of Mexico’s economic outlook include a stronger U.S. dollar, a slowdown in the global industrial and manufacturing sectors, escalating global trade tensions and the tightening of financial conditions. President López Obrador has vowed to combat poverty and corruption by putting forth an aggressive economic agenda that aims to center on addressing income distribution through a much more progressive fiscal policy and empowering the role of the state in key economic sectors—particularly in the energy sector. All of this while seeking to calm markets by promising business-friendly policies and respecting the autonomy of the central bank. Uncertainty remains, however, over whether AMLO’s economic agenda will be motivated by ideology or technically sound proposals.”

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