Mexico: Policy fluctuation is the new norm

3 min
Georges Dib
Georges Dib Economist for Latin America, Spain and Portugal

Since the election of President Andrés Manuel Lopez Obrador (AMLO) we have maintained our cautious stance on his policy fluctuations between business-friendly commitments to austerity and more controversial decisions (see airport project cancellation). In the last thirty days, Congress adopted a fiscally prudent budget, promising a +1% of GDP primary surplus. Then AMLO implemented a quick fix to solve fuel theft – shutting or better guarding pipelines – that is causing gas shortages and is unsustainable. Such fluctuations harm investor confidence; growth could be subdued (~ +2%) for the next two years. Boosting private credit would help lift the cap on growth. Credit to Non-Financial Corporations only accounts for 26% of GDP in Mexico, against 40% in Brazil and 95% in Chile. Yet monetary policy should remain tight this year, constraining access to credit as policy risks and inflation pressures remain; the Central Bank hiked the policy rate last month to 8.25%, the highest in ten years.