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Mexico: the year after

1/10/2020

The Mexican president is committed to keep public finances in control during the term of his mandate, but the budget’s assumptions seem too optimistic to be achievable. In the medium term, the risk of fiscal slippage persists.

TRANSCRIPT // Mexico: the year after : January 2020

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The economic outlook is weakening further 7/1/2020
Mexican real GDP fell by 19.9% year- on- year in April. At the same time, industrial production plunged by 30% (the manufacturing component fell by more than 35%). In addition to the domestic impact of lockdown measures, economic activity has been hit  by the fall in the oil price, disruption in supply chains, and the sharp decline in external demand (especially from the US) affecting both the export and tourism sectors. The Central Bank has lowered its policy rate (by 225 basis points since January, to 5%) and announced several series of measures aimed at  supporting the economy, but this will not be sufficient to cushion the shock. Indeed, the government, preferring to stick to its fiscal austerity policy, has not announced a major fiscal plan to support the economy. All in all, we expect real GDP to decline by more than 10% in 2020. Unlike other emerging countries, the ability of the Mexican economy to rebound appears limited. Growth forecasts for 2021 (less than 3.5%) and beyond are held back by the same factors that hampered recent economic performance before the crisis. The deterioration in the business climate, linked to the mixed messages sent by the government, will notably continue to weigh on investment.
Mexico: sluggish growth in 2020 2/5/2020
According to the first estimates, economic activity contracted for the third quarter in a row in Q4 (-0.3% y/y). Manufacturing industry was the most affected and contracted by 2%. In 2019, real GDP contracted by 0.1%, after recording a 2% growth in 2018. Real GDP growth should pick up in 2020 (+0.6%), but remains under its potential (estimated at 2.5% by the IMF). Indeed, one year after Andres Manuel Lopez Obrador came to power, his economic policy is still hard to read and weighs on investment. The future of the energy sector also raises doubts, affecting investor sentiment, both domestic and foreign. At the same time, the risk of a loss of control of the public finances is growing: against a background of low growth, maintaining the austerity programme proposed by the government will prove more difficult in the coming years.
Slowing down 9/20/2019
After recording a 1.2% y/y growth in Q1, real Mexican GDP contracted by 0.7% y/y in Q2. The lack of dynamism of US activity, weighing on the Mexican export sector and the significant slowdown in both public and private investments, due to deteriorating business and investment sentiments, are the two key factors explaining the slowdown. For the same reasons, the risks remain tilted to the downside for the coming quarters.
Mexico: Slowing growth 6/19/2019
Prospects for the economic growth in Mexico are deteriorating, owing to slower economic activity in the US, a tight fiscal stance and a persistent weakness in private investment. Real GDP growth for Q1 slowed to 1.2% y/y, from 1.7% y/y in Q4 2018. For the whole year, real GDP growth should reach 1.5% (from 2.0% in 2018) and risks are tilted to the downside. On the one hand, trade tensions with the US (following the US President’s announcement to impose tariffs on Mexican imports) will have a detrimental effect on business sentiment, even if the two countries have so far reached an agreement. On the other hand, both the lack of clarity on the government’s policies and the financial support to the state-owned oil company Pemex (which could heavily damage the fiscal balance over the long-term) are clouding the medium-term outlook. Early June, Fitch downgraded Mexico’s and Pemex’s sovereign ratings, while Moody’s changed the outlook to negative (as well as Pemex and several public companies).
Mixed sentiments 2/7/2019
The election of Mexico’s new president, Andres Manuel Lopez Obrador, raises numerous questions. Although the new president and his team enjoy strong popular support, investors are worried about the policies he is proposing for the next six years. Some of the proposals do not seem to be compatible with his promise to maintain fiscal discipline, central bank independence and economic pragmatism in general. Several existing reforms are being called into question, notably in the energy sector. Given Mexico’s strong economic fundamentals, these contradictions are unlikely to have much of a short-term impact. In the medium term, in contrast, the big risk is that they could jeopardise the government’s capacity to maintain fiscal discipline, keep the energy sector afloat and preserve investor confidence.

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