Mexico’s future prospects darken, but economic conditions are solid

The government in Mexico is putting pressure on rule-of-law institutions, rolling back sustainable energy reform and ignoring the economy. In Europe, this is hardly noticed. Nevertheless, Mexico’s finances remain surprisingly solid overall.

by Alexander Busch, Latin America correspondent for Handelsblatt and Neue Zürcher Zeitung

 

The news from Mexico is currently mixed. For example, the outlook for the country’s economy is worsening. In view of stubborn inflation, which at 7.3 percent is now at its highest level in two decades, the central bank is set to raise interest rates more sharply – and thus put the brakes on the economy. It is true that inflation is expected to fall again by the end of the year. But because of the high interest rates, investment banks are forecasting growth of 1.5 to 2 percent this year. This means that Mexico’s economic output will remain below the level at the beginning of the Corona crisis for even longer.

Since 2020, the government has initiated hardly any measures to alleviate the social and economic consequences of the pandemic. The poverty rate has now risen significantly to over 44 percent of the population.

At the same time, the government is intervening more and more actively in economic policy – to the distrust of the business community. For example, Mexico’s sustainable energy reform is being gradually rolled back. In addition, the country’s state-owned petroleum industry is once again being given top priority in the purchase of electricity.

With the decree, according to which state infrastructure projects enjoy priority and are approved without the usual rules on transparency in public tenders, the government is also opening the door to corruption, which is endemic in Mexico. Rumors are also growing that close members of the president’s family are involved in corruption. Mexico ranks 124 out of 180 countries among the most corrupt states in Latin America according to Transparency International.

Oil producer Mexico is benefiting little from the high oil prices caused by the Ukraine crisis: Mexico imports almost twice as many energy products in value as it exports crude oil.

In addition, President Andrés Manuel López Obrador’s attacks on the rule of law are increasing. On April 10, for example, he now wants to hold a referendum on the possible revocation of his six-year mandate. The president expects a high approval rate. Among other things, he hopes that this will give his candidates a tailwind in the gubernatorial elections in six states on June 5. But for the first time, López Obrador’s high approval ratings have dropped (to a still-high 54 from 60 percent at the beginning of the year).

As in some other Latin American countries, state pressure on democracy and the economy in Mexico could increase significantly before the next presidential elections in 2024. But unlike similar trends in Brazil or Argentina, this is hardly noticed in Europe.

On the other hand, Mexico’s finances and foreign trade accounts are surprisingly solid by regional standards. Higher oil revenues stabilize the budget. With a deficit of 3.5 percent of GDP, the state is solidly financed. The central bank has even been able to increase foreign exchange reserves by 12 percent since the beginning of the pandemic. With a debt ratio of around 50 percent of GDP, Mexico is not facing a debt crisis.

Foreign investment also remains stable – albeit at a low level. The automotive industry in particular is benefiting from the recovery in demand. Mexico will tend to benefit from the fact that US corporations prefer to have their suppliers on their doorstep in Mexico rather than in the Far East.

COVID-19 in Latin America

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Currently reported cases in the countries


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