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Mexico Economy: Weak Outlook
Mexico’s economic performance during the AMLO administration has been the worst one since the Great Depression.
BY LATIN AMERICA ADVISOR
Inter-American Dialogue
Mexico’s economy grew 5 percent last year, but it fell into a technical recession in the final two quarters of the year as the country’s gross domestic product contracted in both the third and fourth quarters, according to data that national statistics institute INEGI published on Jan. 31. Latin America’s second-largest economy has been in a difficult position in the past few months, with rising interest rates, inflation above 7 percent and uncertainty over Andrés President Manuel López Obrador’s energy agenda. What factors will be the most important in pushing Mexico away from a recession in the year ahead? What steps can policymakers take to move the economy toward better results? Which sectors show the most promise for growth, and which will likely lag behind?
Lucinda Vargas, research fellow at the Center for Border Economic Development at New Mexico State University: Mexico’s economic growth this year will closely mirror the growth path of the U.S. economy. The two nations are highly integrated via intra-industry trade through the maquiladora and manufacturing export sectors, which are currently exhibiting double-digit growth. Positive prospects in this binational manufacturing base are in part fueled by a nearshoring trend as export companies servicing the U.S. market look to Mexico and away from Asia as a way to avoid or minimize supply-chain bottlenecks. While monetary policy should continue its appropriate tightening course to address inflationary pressures, other policies should focus on deeper problems of institutional weakness that are keeping the country from achieving long-term sustained growth. The flip-flop on energy policy currently at play is an example as it changes the rules of the game for investors. More troubling still in ensuring lasting growth is the country’s poor performance on governance as monitored by the World Bank. In all six governance indicators—voice and accountability, political stability and absence of violence, government effectiveness, regulatory quality, rule of law, and control of corruption—Mexico’s performance has been on a deteriorating trend for the past 10 years. Stronger governance correlates with higher per capita income growth in any country, which is the true measure of whether a country is advancing in its standard of living. Any growth Mexico achieves this year and in the near-term will not translate into sustained growth further into the future if the country continues to ignore the deeper reforms and actions that improve the country’s governance.
Andrés Rozental, member of the Advisor board, president of Rozental & Asociados in Mexico City and senior policy advisor at Chatham House: A very disappointing negative fourth quarter of last year, compared to the same quarter a year earlier, has formally put Mexico in a technical recession. Although the definitive result of GDP growth for 2021 will be made public later this month, the preliminary 5 percent year-on-year growth is far below the objective of the López Obrador administration. This poor result puts the Mexican economy at about the same level as five years ago and makes the country one of the very few middle-income nations not to have reached or exceeded pre-pandemic levels last year. Furthermore, growth estimates for this year have now been lowered to somewhere between 1 and 2 percent, which means that Mexico’s economy won’t reach pre-2019 levels until at least 2024. One must remember that López Obrador promised a 6 percent annual growth for his six-year term, and even though the pandemic lowered growth prospects worldwide, much of the dismal performance in AMLO’s first three years in office is a direct result of his government’s policies to refuse fiscal alleviation to small and medium-sized enterprises to cope with the pandemic, to create uncertainty and instability in the energy sector with his proposal to roll back Mexico’s energy reforms and to return to a 1970s state-dominated economy at the expense of the private sector. I am not at all optimistic that AMLO intends to make any fundamental changes to his ideologically driven economic policy and that the coming months and years will continue to see Mexico’s economy perform poorly, with increasing levels of poverty, inflation and minimal foreign and domestic investment.
Antonio Ortiz-Mena, senior vice president at Dentons Global Advisors-Albright Stonebridge Group: Mexico’s economic performance during the AMLO administration has been the worst one since the Great Depression, and the IMF estimates GDP growth of 2.8 percent this year. If Mexico’s economy grows at 6.3 percent in 2023 and 2024, average GDP growth will be zero, and GDP per capita will be lower than when AMLO took office. The reasons for this dismal performance are external and home-made. On the external front, the Covid-19 pandemic and related lower global growth spurred an economic downturn. However, the Mexican government’s refusal to engage in any significant counter-cyclical fiscal policies meant that the downturn was deeper and the recovery shallower than in comparable emerging markets. Mexico’s GDP growth in 2019–before the pandemic hit–was a negative 0.17 percent. This is partly explained by the unwarranted cancellation of the new Mexico City airport. Regulatory uncertainty and adversarial government-business relations ensued, most notably regarding energy policy. The most important policy changes that would foster greater certainty, a necessary condition to boost investment and thus growth, are to generate more constructive government-business relations conducive to accelerating Mexico’s energy transition and ensuring the provision of reliable, price-competitive clean energy, in addition to strengthening independent regulatory bodies. A second confidence-building measure would be the entry into force of a new Mexico-European Union trade agreement, whose negotiations concluded almost four years ago. Mexico’s trade policy is sound and has saved the country in the past, but is not enough in the face of these domestic policy challenges. Significant domestic economic policy shifts are unlikely.
Alfredo Coutiño, director for Latin America at Moody’s Analytics: Even though the cumulative decline in output in the last two quarters of 2021 was neither significant nor broad-based, the economy showed significant structural weakness that was aggravated by the pandemic and the lack of mitigation policies. The main reason behind the weakness is the chronic anemia of investment. That weakness deepened in the past three years given the reticence of private investment generated by the government’s measures to limit competition and increase the participation of state-owned companies in the economy. Therefore, an important factor to promote investment is to create a favorable climate for business by removing the uncertainty created by the hostile environment against competition, combined with sound macroeconomic policymaking. Unfortunately, all this does not seem very probable, and the economy will continue to report low growth and depend heavily on the external engine more than on the domestic demand. Of course, expansionary policies can also boost growth, but it would be only transitory and not sustained. Hence, the best contribution of economic policy is to provide macroeconomic stability. The economy is still expected to perform positively in 2022, but growth will be insufficient to provide the number of jobs and income required. Export-oriented activities will lead the economic advances, mainly manufactures focused on the U.S. market and primary activities like mining and agriculture. Meanwhile, some services will continue to lag behind, particularly those affected by the changes implemented in the outsourcing law. Growth estimates for this year are in the range of 1.5 percent and 2 percent.
Alma Caballero, director at McLarty Associates: Mexico’s economic growth last year was insufficient to counteract its 8.3 percent GDP decline in 2020. Additionally, Banxico figures reveal a record high of $12.6 billion in foreign capital outflows from the country’s sovereign debt market in 2021. Risks including a global semiconductor shortage, as well as the country’s highest inflation rate in 20 years (7.13 percent) and the congressional debate over AMLO’s constitutional electricity reform bill, compromise Mexico’s growth prospects in the medium to long term. The president has said he still expects the Mexican economy to grow by 5 percent in 2022 despite the IMF’s forecast of 2.8 percent. The agriculture and manufacturing sectors—growing by 0.3 and 0.4 percent, respectively, show the most promising growth. The current government has challenged contracts signed during previous administrations, and public-private sector collaboration remains weak. Sudden changes in regulations coupled with an ideologically driven energy policy leave little room for the 4-6 percent annual economic growth that AMLO promised. However, shifting global supply chains and the expansion of Mexico’s digital economy present a tremendous opportunity. Likewise, trade tensions between the United States and China coupled with a shift in global supply chains due to Covid-19 makes Mexico an attractive candidate for nearshoring. Whether Mexico capitalizes on these opportunities largely depends on government policymaking and public-private sector relations.
Republished with permission from the Inter-American Dialogue's daily Latin America Advisor
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