ranking 15, World Bank 2015)
||127.02mn (World ranking 10, World
|Form of state
||Enrique PENA NIETO (PRI)
- Sound macro-policy framework
- Moderate debt ratios
- Strong, pro-business reform dynamics
- Structural business environment exceeds Latin
- Durable political framework with stable handovers
- Member of OECD
- Easy access to capital markets
- Support from IFIs likely if needed
- Fiscal position highly sensitive to oil price
(>30% of public revenues)
- Sensitive to US business cycle (>80% of
- Skewed income distribution (geographically as
well as among socio-economic groups), still high poverty
- Security issues related to
- Rule of Law and control of corruption below Latin
Subdued GDP growth
Real GDP expanded by a moderate +2.5% in 2015, after +2.2% in 2014.
The primary and tertiary sectors performed well in 2015 and expanded by +3.0%
and 3.3% respectively, while the industrial sector disappointed with +1.1%
Mexico continues to lose momentum rapidly. Real GDP contracted for
the first time in three years in Q2 2016, by -0.5% q/q, after expanding by a
modest +0.8% in Q1. Private consumption has proved quite resilient. Retail
sales expanded rapidly (+8% y/yin July) amid strong consumer confidence.
However, the industrial sector continues to underperform and shrunk by -1.5% in
Q2, dragged down by laggard US economy (-0.5% y/y in July). Mexico’s neighbor
to the north absorbs 80% of Mexican industrial exports.
The economy also feels the pinch of tight fiscal and monetary
policies. Despite moderate inflation (+2.7% y/y in July), the Central Bank has
raised its key policy interest rate by +125bps to 4.25% since December 2015.
This was done to smoothen the impact of external shocks on the currency, with
the risk of a Fed rate hike in mind. Further hikes in the key rate are
expected. At the same time, the government has announced several cuts in the
budget due to still low oil revenues and investors’ concerns about public
finances. Overall, spending cuts worth more than 1pp of GDP have been declared
since the start of the year.
All in all, we expect the Mexican economy to grow by +1.7% in 2016
and +2.2% in 2017.
External balances have deteriorated
Ongoing low oil prices and disappointing economic activity in the
US are weighing down on exports. The effect is significant: -7% since
late-2014. The trade deficit has widened to -USD1.8bn in July 2016. Only a year
and a half ago trade was balanced. The current account deficit is expected to
widen to -3% in 2016, and to reach -2.8% in 2017.
The Mexican peso is underperforming and will continue to be plagued
by high volatility. Along with the Argentine peso, the MXN is the only
important LATAM currency to have depreciated against the USD since the
beginning of the year. It is particularly vulnerable to external shocks and one
of emerging markets’ most liquid currencies.
However, external financing should not be a problem. The current
account deficit is almost entirely covered by FDI inflows while Mexico benefits
from easy access to capital markets and enjoys a Flexible Credit Line by the
IMF. Foreign exchange reserves have diminished to USD174bn in July (-7.7% y/y)
as the Central Bank has intervened in the FX markets to support the peso.
Reserves now cover above 5 months of imports.
The business environment is overall good. Mexico ranks 38th out of
189 in the 2016 World Bank’s Doing Business Survey. It is a rather good
position when compared with other LatAm peers.
Last review: 09/27/2016