Domingo 23 de Septiembre 2018
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Mexico's president-elect Andres Manuel Lopez Obrador (right) with outgoing president Enrique Peña Nieto at the Presidential Palace on August 20, 2018. (Photo: LopezObrador.org)
Wednesday, September 12, 2018
Perspectives

AMLO Faces Weaker Mexico Economy


Mexico’s next president faces a weaker economy, experts warn.

BY LATIN AMERICA ADVISOR
Inter-American Dialogue

Mexico’s central bank on Aug. 29 lowered its estimates for growth this year and next year but added that progress in the talks to revamp the North American Free Trade Agreement could remove some uncertainty from the growth outlook.

The central bank said it now expects Mexico’s gross domestic product to grow between 2 and 2.6 percent this year and between 1.8 and 2.8 percent next year. What are the biggest headwinds that Mexico’s economy is facing, and which industries will be the most affected? What are the biggest reasons for optimism about future growth? How much are Mexico’s economic policymakers relying on a successful outcome of the NAFTA talks?

Sergio Luna, chief economist at Citibanamex: We have been forecasting GDP growth of 1.9 percent for 2019 since April, based on two key assumptions. First, on AMLO’s victory in the presidential election, and second, on a successful renegotiation of NAFTA. We thus find natural revisions like Banxico’s, as those premises have proved valid. In the case of NAFTA, ‘success’ is a relative concept. The bilateral agreement that the United States and Mexico announced is positive in the sense that it helps to mitigate some of the more worrying features of the protectionist proposals of the Trump administration, but it still implies either status quo (fortunately, in agriculture) or even losses versus the current situation (for example, the regional rules of origin for the auto sector). All in all, when it comes to 2019 prospects, the U.S.-Mexico agreement is positive because it reduces a source of uncertainty. But the agreement itself does not imply an extra stimulus to economic activity. In the case of AMLO, two aspects are behind our current projection.

First, while we do not think the energy reform will be reverted, its execution will proceed more slowly; this should therefore limit the upside for private investment.

Second, the major fiscal re-engineering AMLO has in mind will face implementation challenges, and therefore we think public expenditure will be unusually weak in the first half of next year; this should affect activities such as construction. Eventually, we expect the fiscal stance to shift to the opposite direction, but for all of 2019, these factors should imply a softening of economic growth.

Alfredo Coutiño, director for Latin America at Moody’s Analytics:  A positive trade agreement with the United States and Canada removes a risk factor but does not resolve Mexico’s structural bottlenecks.

Mexico still has a long way to go to lift its structural restrictions and increase the economy’s production capacity, which is necessary to attain higher and sustainable growth rates. Mexico’s central bank reduced its growth estimates because the economy is showing its limited capacity and prolonged weakness. In 2018, the economy was expected to grow more because of the positive impact of reforms and the expansionary effects of the political cycle in a year of elections. However, the economy was affected by threats from the U.S. government regarding trade and investment, the Fed’s rate hikes and uncertainty surrounding elections. As a result, the economy will grow around 2 percent in 2018. Next year, the economy will be affected by, first, the traditional deceleration of the first year of each new administration, when the execution of the federal budget is delayed due to the change of the economic team. Second, it will be affected because the economy is also weakening because of anemic investment.

Third, the economy will be affected because fiscal and monetary policies were tightened by force in order to correct imbalances and distortions. Another headwind comes from the continuation of the Fed’s rate hike cycle, which imposes pressures on domestic monetary policy. In addition, markets will remain cautious, looking at how the new government will manage the economy during its first year. The trade agreement seems to be resolved, at least as a bilateral accord.

Mexico’s future depends on the ability of the new government to address low growth through the fundamental source of growth: accumulation of capital, instead of by using expansionary policies. A new NAFTA will help, but it will not resolve the economy’s chronic anemia.

Tapen Sinha, professor of risk management at the Instituto Tecnológico Autónomo de México and professor at the University of Nottingham Business School: Let us take one step back and ask ourselves the following question: How good have the Banxico forecasts been about GDP growth in the past? If we examine 24-month out forecasts for the past two decades, the average predicted growth was 3.84 percent, whereas actual growth was 1.13 percent.

It is a little better when we examine the 12-month ahead forecasts. However, one element remained constant: The actual growth rate has consistently run below the forecast.

This should caution us not to take Banxico forecast numbers seriously. The Mexican economy has been bubbling along at about the same pace overall for the past two decades. Compared with the United States, the growth rate has been far more volatile.

This is a feature, not an exception. If we examine the Mexican economy for the past 100 years, volatility has been much bigger than the country’s northern neighbor. While Mexico is not growing at the rate of China or South Korea, it would be useful to recall that the U.S. economy has grown at the rate of 2 percent per year over the past two centuries.

What needs to be done to improve economic growth in Mexico? Santiago Levy has prescribed the employment of salaried workers.

With a large body of data, he showed that if firms can employ salaried workers even if they are in the informal sector, the productivity in Mexico can be substantially raised. The productivity (or lack thereof) in Mexico has been the key factor. For example, per capita GDP in South Korea was the same as Mexico in 1985. But South Korea has moved to a different orbit since, thanks to growth in labor productivity. Mexico has not.

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

 

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