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Mexican Central Bank Governor Alejandro Díaz de León with President Enrique Peña Nieto. (Photo: Mexico Central Bank)
Wednesday, February 28, 2018

Mexico Economy: Stable Outlook

Mexico’s economy has a stable outlook despite election uncertainty.

Inter-American Dialogue

Mexican President Enrique Peña Nieto, suffering politically with low approval ratings during his final year in office, on Jan. 31 celebrated better economic news, with an impressive $93 billion oil-sector auction and new data from the national statistics agency showing that growth in the fourth quarter increased more than expected, up 1 percent from the previous quarter. How well have Peña Nieto and his team managed Mexico’s economy? What role is the economy playing in the run-up to July’s national election? Is central bank chief Alejandro Díaz de León off to a good start since taking over from Agustín Carstens in November, and what priorities and pressures will the new Banxico head be facing in the months ahead?

Wolfram F. Schaffler Gonzalez, director of the Texas Center for Border Economic and Enterprise Development at Texas A&M International University: In Mexico, the end of a ‘sexenio,’ or presidential term, traditionally has meant more federal and state investments that stimulate the economy in social programs, infrastructure and advertising that directly or indirectly seek to influence voters. This is true for the first six months of the last year of the presidency, while the second half, the ‘lame duck’ period, sees the opposite. Over the last 30 years, this reality has sometimes generated economic crisis, but apparently 2018 will not be one of those years, even when you consider the multiple uncertainties that are now present, such as the NAFTA renegotiation, the external impact of the U.S. tax reform, and the strength of the U.S. dollar vis-à-vis other national currencies, all of which are external uncertainties. The most important internal uncertainty in Mexico is the result of this year’s election. While the economy might change at a moment’s notice, President Enrique Peña Nieto’s government is closing strong in the economic arena. Growth is within what is expected and has a good outlook, the peso has rebounded, inflation has decreased, job creation has grown and FDI in the energy sector has hit an all-time high since the 2013 energy reforms. While it remains to be seen how the interplay of these uncertainties relate to changes in the markets, and to the new policies that are to be expected when the new president of Mexico is sworn in, whoever he or she is, at this moment in time, the outlook for the Mexican economy appears stable, with a slight but steady tendency to grow, and eventually overcome internal or external challenges.

Alberto Ramos, managing director and head of Latin America economic research at Goldman Sachs in New York: Notwithstanding the domestic and external risks and challenges, we reckon that the economy continues to be well-managed, the policy approach conventional and market-friendly, and, on all counts, there are no signs of major deep-seated domestic or external macro imbalances. In fact, in the calibration of monetary, foreign exchange and fiscal policy, the authorities have been steadfast in responding proactively to the evolving challenges in the quest to strengthen domestic macro fundamentals. Furthermore, the authorities have embraced a number of important structural reforms; key among the reforms are the opening of the severely under-invested and inefficient oil and gas sectors to private capital. While growth has been modest and uninspiring, the labor market remains strong, with the unemployment rate currently at multi-year lows. More than the performance of the economy and the broad macro picture, law and order issues, such as corruption and public security, and the role of the state in the economy, will likely feature prominently during the election campaign. Central Bank Governor Díaz de León is off to a very strong start. Under his leadership, the monetary authority has been clear in its communication and guidance and steadfast in the calibration of monetary policy to deal with the current inflation challenges and to build resilience against the significant risks and uncertainties that lie ahead. Finally, in coming months, the central bank may face pressure to ease monetary policy to support domestic demand. However, in our assessment, the overriding priority of the central bank should be to deliver low and stable inflation (i.e. preserve the successful inflation-targeting framework as the nominal anchor of the economy), for that is the best contribution the monetary authority can give to sustainable socially inclusive growth. In addition, the central bank should act, as it has been doing, to preserve the public and social good that is financial stability.

Alfredo Coutiño, director for Latin America at Moody’s Analytics: Mexico’s economy ended last year with the traditional deceleration that has characterized the fifth year of each government in the past three decades. The economy grew 2.1 percent, after 2.9 percent in 2016 and 3.3 percent in 2015. Compared with the previous two administrations, the economy advanced half a percentage point more, as an average in the present government. However, despite the series of reforms implemented, the root of the limited growth was unresolved anemic investment. Since the economic program of the government targeted productivity instead of the accumulation of capital, growth remained limited to a potential rate of only 2.5 percent. After the start of the administration in 2013, and until 2016, economic policy turned expansionary on purpose. As a result, growth increased only transitorily but not sustainably, and the macroeconomic imbalances widened. During the first half of the administration, the fiscal deficit widened, government debt accelerated, external imbalance deteriorated and, more recently, inflation started to trend up (since mid-2016) after falling below the 3 percent target. The fiscal indiscipline was accompanied by monetary accommodation, even to the point of making monetary policy subject to fiscal dominance, to some extent. This year, the economy will benefit from the expansionary effects of the political cycle, since the extra spending to finance political campaigns and the electoral process will boost domestic demand. But also, after the election, the economy will suffer the opposite effect: contraction of spending. This year, the central bank was left with no option other than tightening beyond neutrality, given the galloping inflation that reached a rate of more than twice the 3 percent target at the end of 2017. The central bank needs to reinforce its commitment with the monetary mandate: price stability, by effectively using the monetary instrument to domesticate inflation.


Juan Carlos Hartasánchez Frenk, senior director at Albright Stonebridge Group: The Mexican economy showed great resilience last year. Few would have expected that a year ago. The Mexican government had just announced profound cuts to public spending, and Donald Trump’s election had led to a sharp depreciation of the peso. However, fueled by record remittances, higher exports and tourism, the economy grew above 2 percent. Investor confidence increased with a dynamic and stronger domestic market and the consolidation of some structural reforms. Inflation, unfortunately, was the escape valve, increasing to levels not seen in the past 15 years (close to 7 percent). Controlling inflation in 2018 will be a thorny task for Alejandro Díaz de León. On Feb. 8, Banxico raised interest rates by 25 basis points, to a level of 7.5 percent. This is the second consecutive raise with Díaz de León at the helm of the bank. Although the interest hikes have successfully lowered inflation expectations for 2018 to just over 4 percent, Díaz de León will face significant challenges to controlling inflation without negatively affecting the economy. Most significantly, the Fed’s expected tightening of monetary policy, international market volatility, tax reform in the United States and uncertainty over NAFTA and Mexico’s presidential election can debilitate the peso and create inflationary pressures; depending on their degree, these pressures could push Banxico to further increase interest rates and adversely affect economic growth. Indeed, any reduction to economic growth expectations will affect the presidential election campaign,and can represent a fatal blow to the PRI’s aspirations.


Republished with permission from the Inter-American Dialogue's daily Latin America Advisor


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