Mexico’s domestic policies jeopardise economic growth

Subject

Slow growth.

Significance

Mexico’s economy took an unexpected plunge during the first quarter of 2019, contracting by 0.2% quarter-on-quarter. The slowdown is becoming more widespread amid declines in industrial production and services. All major international financial institutions, the Bank of Mexico and even the Ministry of Finance have slashed their growth forecasts for this year to around 1.6%. President Andres Manuel Lopez Obrador (AMLO)’s promise to achieve an average annual growth rate of 4% over his six-year mandate -- more than double Mexico’s sluggish average rate for the last decade -- is looking increasingly unobtainable.

Impacts

• Risk of a US-Mexico trade war has seen peso depreciation and, if sustained, will hit investment and inflation, ultimately harming growth.
• Public spending cuts will hit investment projects, with private investment, hampered by falling confidence, unlikely to fill the gap.
• AMLO’s energy policy may weaken the finances of Pemex; downgrades for both Pemex and the sovereign cannot be ruled out.
• Inflation risks remain to the upside, mainly due to peso weakness and wage pressures, reducing the chances of an early rate cut.