Emerging

A fragile recovery

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Eco Emerging // 2 quarter 2021  
economic-research.bnpparibas.com  
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MEXICO  
A FRAGILE RECOVERY  
Thanks to a strong Q4 rebound, the contraction in real GDP was limited to 8.2% in 2020, the public deficit did not  
swell as much as expected, and 2021 growth prospects were given a boost. Yet the recovery is still fragile: private  
consumption and investment have both taken a lasting hit from the 2020 crisis, and the export sector will not benefit  
fully from the expected rebound in US growth. The crisis also exacerbated concerns about the vulnerability of public  
finances and the decline in investment, which will undermine medium to long-term growth prospects.  
STRONGER-THAN-EXPECTED REBOUND  
FORECASTS  
Real GDP contracted 8.2% in 2020. The economy was hard hit by the  
collapse of domestic demand due to lockdown measures and the drop-  
2
019  
2020e  
2021e  
2022e  
off in external demand, mainly from the United States (80% of total  
exports). Prospects continued to erode during the first three quarters  
Real GDP growth (%)  
0.1  
3.7  
-8.2  
3.4  
4.0  
3.9  
2.7  
3.7  
(
at the end of Q3, real GDP was expected to decline by more than 10%  
Inflation (CPI, year average, %)  
Budget balance / GDP (%)  
Public debt / GDP (%)  
in 2020), but the strong Q4 rebound helped limit the decline in full-year  
GDP and to improve the growth prospects for 2021 and 2022.  
-1.7  
46.4  
-0.2  
37.7  
180.0  
3.5  
-2.3  
50.8  
2.5  
-4.1  
52.3  
0.9  
-4.8  
54.5  
0.5  
Even so, the recovery is still fragile and GDP is unlikely to grow by  
more than 4% in 2021. Exports will be the main growth engine, fuelled  
by the rebound in the US economy and by the American Recovery  
Plan. In contrast, domestic demand will remain weak, undermined by  
the drop-off in activity in Q2 2020 (real GDP contracted 18.7% y/y),  
and by extremely limited government support. Public spending will  
barely increase again this year after the government reiterated its  
determination to pursue the austerity programme announced at the  
Current account balance / GDP (%)  
External debt / GDP (%)  
41.2  
195.0  
4.3  
41.8  
203.0  
4.5  
42.5  
209.0  
4.1  
Forex reserves (USD bn)  
Forex reserves, in months of imports  
e: ESTIMATES & FORECASTS  
TABLE 1  
SOURCE: BNP PARIBAS GROUP ECONOMIC RESEARCH  
TWO SPEED RECOVERY  
beginning of it’s mandate. After providing massive economic support in  
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2
020 , the central bank is also likely to make more limited interventions  
in 2021. Our scenario calls for the key policy rate to be maintained at  
the current rate of 4%.  
1
10 index, dec19 = 100  
00  
90  
THE HEALTH SITUATION IS STILL FRAGILE  
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The risks are on the downside due to the fragility of the health situation.  
The vaccination campaign has fallen behind initial targets, and the  
number of new daily cases is still relatively high. At the end of March,  
the number of people who had received their first dose of the vaccine  
was slightly below 5.5 million (less than 4.5% of the total population),  
while 750,000 had received their second dose (barely more than 0.5%  
of the population). According to recent government announcements,  
the vaccination rate should accelerate in the days ahead. The goal is to  
vaccinate half of the population with two doses by the end of the first  
half, and the entire population before the end of 2021. These targets do  
not seem to be very realistic given the difficulties the government has  
had in procuring the necessary doses and the pace of the vaccination  
campaign so far.  
80  
70  
Manufacturing exports  
Manufacturing imports  
Goods consumption  
Services consumption  
60  
50  
2019  
2020  
2021  
CHART 1  
SOURCE: CENTRAL BANK  
Moreover, the health emergency that was declared in February 2020  
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is still in effect, as well as the colour coding system set up last  
May to indicate the level of restrictions in vigour in each state. After PUBLIC FINANCE CONCERNS  
holding steady at about 5,500 new cases since June, the number of  
The public deficit was not as high as feared in 2020, at 2.3% of GDP,  
compared to 1.7% in 2019, thanks to a very tight grip on public  
spending (economic support measures barely totalled more than 1%  
of 2020 GDP), higher Q4 revenues (thanks to the increase in oil prices,  
and to a lesser extent, the rebound in growth) and the postponement of  
a financial transfer to Pemex, the state-owned oil company. Naturally,  
the public debt ratio did not increase as much either, at 50.8% of GDP,  
compared to 46.4% in 2019.  
daily new cases rose continuously between mid-November and the  
end of January, peaking at 17,000 new cases. At that time, virtually all  
states were in the red zone. The number of new daily cases has fallen  
continuously ever since, to slightly below 4,500 cases at the end of  
March, when 8 states were still “orange”, 3 were “green” and the other  
2
1 were “yellow”.  
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2
The key rate was lowered by 300 basis points to 4%, and a series of economic support measures were set up during the summer for a total of nearly 4% of GDP.  
Green, yellow, orange and red, depending on the virus infection rate and hospital occupancy. Restrictions are at maximum levels in the red zones.  
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Eco Emerging // 2 quarter 2021  
economic-research.bnpparibas.com  
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Despite this relatively good performance, the fiscal situation is still dif-  
ficult and pressures could even worsen. Contrary to the government’s  
GFCF  
2
021 fiscal targets (stabilisation of the deficit at about 2.5% of GDP over  
the next two years), we expect the public deficit to increase to 4.1% of  
GDP in 2021. As in its previous budgets, the government’s forecasts  
seem to be overly optimistic and will be hard to reach, not only in  
terms of GDP growth, but also for Pemex’s financial situation and oil  
production. The government’s 2021 production target is 1.86 million  
barrels per day (mb/d). In 2020, the target was 1.95 mb/d, but in the  
end, production actually came to only 1.65 mb/d.  
Given the feeble rebound in domestic demand, fiscal revenues are  
unlikely to rise much. Moreover, social pressure and the ongoing  
deterioration of Pemex’s situation will probably require massive,  
recurrent government transfers in the quarters ahead, which should  
significantly increase spending as of 2021. Moreover, to offset the loss  
of revenue in 2020, the government has already drawn heavily on the  
oil sovereign wealth fund. The remainder will probably be used in  
y/y %  
1
0
5
0
5
-
-
-
10  
15  
Investment  
Construction  
-20  
-25  
-30  
-35  
-40  
Machinery and equipment  
2016  
2017  
2018  
2019  
2020  
2021  
2
021, but the remaining amount will not suffice (0.2% of GDP at year-  
CHART 2  
end 2020, compared to more than 1.5% of GDP at year-end 2019). The  
remainder of available fiscal savings and any central bank transfers  
will not suffice to provide a sustainable solution, further reinforcing the  
need for fiscal reform.  
SOURCE: NATIONAL INSTITUTE OF STATISTICS AND GEOGRAPHY  
Under these circumstances, public debt is expected to exceed 52% of In the medium term, the mistrust felt by local and foreign investors  
GDP in 2021 and to continue to swell in 2022, bringing the public debt could spread to all sectors of the economy. We expect investment to  
ratio to the highest level in more than 40 years. The deterioration in decline again in 2021: the investment rate has already fallen from  
public debt dynamics, higher contingent risks pertaining to Pemex, the 23.6% of GDP in 2016 to 19.3% in 2020, according to the latest IMF  
erosion of the sovereign wealth fund and the absence of structural figures. Similarly, net inflows of foreign direct investment (FDI), which  
reforms could make the government more vulnerable to changes in have declined since mid-2018, are expected to contract again in 2021.  
investor sentiment. Although public debt still has a favourable profile, All in all, despite the rebound in growth in the very short term, we  
with about 80% denominated in local currency, more than 30% is held do not expect Mexican GDP to return to the pre-crisis level (year-end  
by non-resident investors.  
2019) before the end of 2022. The country’s potential growth rate has  
been revised to 2%, from close to 2.5% at the end of 2019.  
INVESTMENT DECLINES AGAIN  
Completed on 9 April 2021  
Structural fragilities, such as a low investment rate and the  
deterioration in business sentiment, existed well before the outbreak  
of the Covid-19 crisis and will continue to strain growth prospects  
in the short to medium term. Some of these weaknesses have even  
been exacerbated over the past 12 months, including a rather opaque  
economic policy and questions about the private sector’s participation  
in certain key segments of the economy. The electricity sector reform  
that was approved in early March 2021 strengthens the role of state-  
owned companies to the detriment of the private sector, which could  
place a lasting damper on investment.  
Hélène Drouot  
helene.drouot@bnpparibas.com  
Investor mistrust could be strengthened by the outcome of June’s  
elections, including legislative elections as well as elections for 15  
state governors. According to the polls, the popularity of President  
Andres Manuel Lopes Obrador (AMLO) is very high (above 60% since the  
beginning of his mandate), and the president is personally implicated  
in the campaigns for the legislators as well as for the 15 gubernatorial  
candidates from his party. Morena, the presidential party, and its two  
allies, the centre-left PT and the centre-green PVEM, are expected to  
hold onto a majority of seats in the Chamber of Deputies (currently, the  
three coalition parties have 300 seats out of a total of 500). Given this  
configuration, the government should have no trouble implementing  
the reforms it is planning for the second part of its mandate.  
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QUI SOMMES-NOUS ? Trois équipes d'économistes (économies OCDE, économies émergentes et risque pays, économie bancaire) forment la Direction des Etudes Economiques de BNP Paribas.
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