Mexico reaches the largest elections in its history in an effervescent economic context. The winds of commercial geopolitics blow in their favor, while, in the interior of the country, families have more money in their pockets. Last year, the economy grew 3.2%, above its Latin American peers, while its currency strengthens to levels not seen since 2015. This year, the economy is not among the biggest concerns among the electorate.
But not everything is won. For the next president (most likely, and for the first time, a woman) this clear sky is already beginning to cloud over. The most recent data show that the Gross Domestic Product (GDP) has been stagnant for two consecutive quarters. Fixed investment, a key measure of growth to come, has slowed in the same period. At the same time, analysts warn of two important deficiencies: a delicate fiscal situation and the lack of a plan to attract investment seeking to leave China.
The current moment of optimism was a long time coming. In 2019, before taking the presidency, Andrés Manuel López Obrador rushed to fulfill one of his campaign promises: cancel the construction already underway of a new airport for Mexico City. The reaction of the markets showed how little they knew about the candidate, as investors reacted by selling their assets in pesos, plummeting the exchange rate. Fixed investment, that destined for construction or the purchase of machinery, also had a drop that continued until 2022. The economic contraction due to the pandemic was more than 8% of GDP, one million companies closed permanently and the Mexico’s recovery was the slowest in Latin America.
Having passed the post-pandemic inflationary peaks, Mexico still does not reach the central bank’s objective of 3% (the most recent inflation figure is 4.78% in May), so the monetary authorities have already made a rate cut of interest. The Mexican economy “looks good,” says Alberto Ramos, Goldman Sachs’ chief economist for Latin America, in a flat, unenthusiastic tone.
“When you look at the macroeconomic outlook, you don’t see any major imbalance that requires immediate corrective policy action. There is not a large current account deficit or out-of-control inflation,” says Ramos, on the phone from New York, “the only thing is that it seems that Mexico may not be taking full advantage of the opportunities that have presented themselves.”
After the bitter pill of the cancellation of the airport, investors are now looking at Mexico because the United States has escalated a trade war with China. President Joe Biden has expanded bans on American companies investing in China, imposed 50% tariffs against that country and designed incentives to attract the production of electric cars and semiconductor chips.
With a new free trade agreement between North American countries barely four years old, Mexico is a natural alternative to the so-called nearshoring. The Ministry of Economy has called it the “Mexican moment”, boasting record numbers of Foreign Direct Investment (FDI) that reached 20.3 billion dollars in the first quarter of the year. These flows, in combination with the strong income of family remittances, explain how the exchange rate has appreciated 17% since López Obrador came to power, currently trading close to below 17 pesos per dollar, a level not seen in nine years.
“If it weren’t for populist nationalist policies, the country would probably, at this stage, be attracting many more investments and the economy will grow more quickly, but they are still too nationalist, too introspective,” says Ramos. López Obrador not only passed legislation to guarantee a monopoly for hydrocarbon and electricity parastatals, but has also entered into direct confrontation with a US mining company that accuses the Government of trying to expropriate its plant in Quintana Roo.
The regulatory framework is not the most favorable to investment, believes Ramos, and the country is still wasting many public resources in the Federal Electricity Commission (CFE) and Petróleos Mexicanos (Pemex). According to one estimate, the debt of more than $100 billion of the oil company, the most indebted in the world, is equivalent to more than 8% of GDP. Under López Obrador, billions in public resources have been injected.
“The problem is not only the debt, but Pemex’s entire business,” says Alejandra Macías, Research Director of the Center for Economic and Budgetary Research (CIEP), a nonprofit organization. “No matter how much help they are given, they don’t seem to get better. A piece of the debt is paid here and another here, but it continues to have losses from refining and other businesses. I think that the rethinking, for the next Administration, has to be more comprehensive,” adds Macías.
If López Obrador did not want to go into debt to stimulate the economy during the confinements of the pandemic, he did do so in his last year of Government, with the justification that he had to finish his priority infrastructure works: a tourist train known as the Mayan Train, the Interoceanic Corridor of the Isthmus of Tehuantepec designed to potential trade and a refinery in its home state of Tabasco. Furthermore, in compliance with the electoral ban, four months of direct transfers to the population were brought forward at the beginning of the year. This has led consumption to a maximum record, according to data from the National Institute of Statistics and Geography (Inegi). To finance it, it went out into the international market to issue billions of dollars in bonds, becoming the largest issuer in its category worldwide.
López Obrador was very lucky. His predecessor, Enrique Peña Nieto, did the heaviest work in renegotiating the free trade agreement, in which businessmen agreed to pay better wages. López Obrador managed to execute this agreement, with average increases of 20% annually, which boosted family income and helped nearly five million people escape poverty. All presidential candidates have said they will continue this policy if they come to power.
Ramos and Macías agree that the next Administration will no longer have the same luck and this is, in part, by design. López Obrador left in Congress a broad agenda of reforms that include an increase in social aid, specifically, pensions for older adults. To pay for this type of current spending, the Government has gone into debt, something that is not sustainable in the long run, warns Macías. CIEP estimates show that between 2016 and 2024, fiscal space reduced from 4.7% to 0.9% of GDP. Between last year and this year alone, the room for maneuver for government spending shrank 60%.
“What are the expenses already committed and that you cannot reduce? That of debt, pensions, transfers to States and municipalities. Resources to social security, to state companies. You can no longer modify those items. So, when you make that subtraction of income, less committed expenses, the space you have left to do other things becomes increasingly smaller,” explains Macías.
The official candidate, who has a 20-point lead in polls, has assured that the deficit will go from 6% of GDP this year to 3% next year, without the need for a fiscal reform to raise taxes. “What worries us most is that she is inheriting a more challenging fiscal landscape than the one she inherited from AMLO,” says Ramos, “(Sheinbaum) has made an empty promise that next year they will reach 3%. I don’t think they reach 3%. I think the market can give them a pass if they get to 4% or 4.5%, which will require difficult legislation. But eventually, in the next 2 or 3 years, she may need tax reform.”
For her part, the candidate who is in second place in the polls, Xóchitl Gálvez, also assures that it is not necessary to implement a tax reform, since it would boost the nearshoring to grow the economy. His plan is ambiguous, but it has a central driving force: resurrecting the participation of private companies in the energy sector to guarantee supply to companies that relocate to the country.
Sheinbaum’s proposals, on the other hand, are a continuation of the López Obrador project, an Administration that closed investment promotion agencies abroad and that has left state governments the task of receiving foreign companies interested in opening operations. the country. In a presentation last month to the banking industry, Sheinbaum proposed that to take advantage of the nearshoring It will build the roads and power plants necessary for the private sector to build 100 industrial parks. His campaign has been very careful not to propose something that is not in line with what President López Obrador has done.
Considering voting preferences, and barring a surprise on election day, Ramos’ focus during this electoral contest in Mexico is focused on the leading candidate. “There is a big question mark which is, who is Claudia Sheinbaum? We don’t know,” says the economist.
He is younger and has a higher educational level than López Obrador, Ramos highlights, “on the other hand, some say that he has a more dogmatic, ideological and left-wing character. So there’s like a left queue and a right queue. Nobody really knows. Maybe she’s going to be more pragmatic. Perhaps she has a more modern vision of the energy sector, of the green transition, although we know that she believes in a dominant Government and in reserving a market for CFE and Pemex. So the truth is, a few weeks before the election, we don’t know enough.”
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