Mexico: Steady Through Uncertainty

‘Resilient’ has been a good word for the Mexican economy in recent years. An on-again, off-again world economy usually has a magnified effect on Mexico. Not this time; through the global bump-and-grind, Mexico has chugged along at a decent pace, plugging away at an aggressive reform agenda and all the while attracting impressive dollops of investment. In a generally reticent world, that is saying something. But is Mexico’s smoother ride about to get a lot more bumpy?

The question is a serious one. Fiscal finances are dependent on oil revenues, and world oil prices have been more than cut in half over the past three years. Pemex, the national oil company, is also dependent on these revenues, and is slashing its spending plans. In addition, the peso is getting hit not just by weaker commodity prices, but by the anti-Mexico rhetoric in the US election campaign. The President is sagging in the polls, with his popularity the lowest for a sitting president since 2000. This was exacerbated by the disastrous Trump visit, which led to the resignation of his highly-regarded finance minister.

Of all these issues, the most pressing at the moment is the discourse in the US election. Canada shares the worry, but Mexico’s burden is greater. Anti-NAFTA talk is primarily aimed at Mexico, with US industrial investments there being characterized as having cost America millions of jobs. Talk of building a wall between the two economies is a direct threat not just to people-movements, but also to those considerable investment flows, and possibly also to remittances from Mexican Americans back to the home country, a huge source of Mexican income.

Is it starting to hit growth? Second-quarter real GDP did slide by an annualized 0.7 per cent, but that was more due to a temporary swing in US inventories, which is now righting itself. Prior to that, growth had been steady, and there is little reason to expect a big interruption. This is primarily because investments are made on a fairly long horizon, and the large projects are hard to unwind in an instant, especially if large commitments have already been made.

Making an argument based squarely on momentum is cold comfort, though. What of the future? While each one of Mexico’s current challenges does indeed pose a risk to medium- and longer-term investments, the outlook is still looking positive for Mexico. First, it has built up a significant cluster of businesses in key industries, and the efficiencies they are generating are unmistakable. Second, the reform agenda is still expected to proceed, as current political difficulties are unlikely to disturb what has already been legislated. Third, Mexico’s international competitiveness still makes it an attractive location for more labour-intensive business, and for business that want to have a broader reach into Latin American commerce. Fourth, an ageing OECD population – not to mention budding labour tightening in the US – makes Mexico’s abundant and increasingly higher-skilled labour force a magnet for foreign investments from a number of different international locations. Finally, increasing average wealth over the long term bolsters the argument of locating businesses there in order to sell locally.

Investment will not be an elixir for Mexico’s current ailments, but at least for the moment, the case for maintenance of inflows looks quite positive. Preserving and enhancing internal stability on a few key fronts will be key to encouraging further investment flows. First, ensuring a solid fiscal framework – in spite of oil price movements – will be important for businesses that might otherwise be worried about a rising future tax liability. Second, investments are still vulnerable to negative news around crime and violence. Third, price and currency stability, managed well in the past few years, is also an important piece of the investment-attraction puzzle. The appointment of Finance Minister José Antonio Meade has been a very positive move in this regard.

The bottom line?

Mexico is facing key challenges that are threats to future investment. Like Canadians, they are nervously watching elections to the north of them. But the significant structural changes that the economy has made over the last few years form an investment bedrock that, provided stability is maintained, bodes well for the economy’s near-term future.

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