Mexico’s Economic Recovery Still Uncertain

You can watch the video of this presentation here.

The automotive industry is considered a pillar for Mexico’s economic recovery. However, there are some factors to consider regarding how this recovery will unfold. During the closing presentation of Mexico Automotive Summit 2021 on Thursday, Mar. 25, Alejandro Valerio, Associate Practice Leader Mexico and Central America at FrontierView, talked about how the automotive industry will be the winner in Mexico’s economic recovery, detailing the key variables to consider in the short and medium term.

The first key driver involves the reoccurrence, length and stringency of social distancing measures and restrictions in the country. According to Valerio, Mexico has become the worst-hit country by the pandemic in Latin America. Mexico’s economic reopening is linked to the states’ progress in the traffic-light system of COVID-19 contagion. To date, 50 percent of the map is in yellow after being in red during the first two months of the year. Coupled with this uncertainty, the Mexican peso faces another threat stemming from López Obrador’s energy reform and his warning on Banxico’s independence.

Valerio explained that peso’s stability has a high risk of faulting, as negative factors weighing it down far exceed those keeping it safe. Among the negative contributors are also PEMEX’s dire financial situation, the US tight monetary policy, Mexico’s credit rating downgrade and COVID-19’s effects on the economy. “Mexico’s economic outcome in 2021 will depend on how the government handles the pandemic and how the US economy fares,” said Valerio.

Vaccination plays a significant role in the recovery process, making it the second key economic driver. In the best scenario, which is the one portrayed by global governments, by 2022 we will reach complete mass vaccination in China, Europe ad the US. Herd immunity will be reached and export revenues will begin to recover. In this scenario, pre-pandemic levels will not be reached until 2021 but the recovery will be significantly higher than in 2020. According to FrontierView’s studies, this scenario is 10 percent likely to occur. Considering the vaccination programs to date, Mexico has vaccinated around 4.6 percent of its population, so it is unlikely the country will reach a blooming economic development before the end of 2021.

Government stimuli make up the third economic driver. According to Valerio, López Obrador might need to recalibrate its policy agenda to conform with Biden’s new priorities, especially regarding renewable energy. Private investment recovery prospects are the fourth driver. FrontierView foresees a K-shaped recovery at the industry level. According to Valerio, the agriculture sector was the most resilient in 2Q20 while the manufacturing industry bounced back in 3Q20.

The last key river is external demand and competitiveness regarding Mexican exports. This also considers USMCA’s impact, which is expected to change the market in the mid to long-term with the introduction of digital trade, new rules of origin, labor-related disputes, wage increases and environmental disputes. USMCA will also strengthen Mexico’s manufacturing states and some key industries, including the automotive industry, as it positioned itself in fifth place in terms of exports between 2007 and 2019. As a result of US demand, the automotive and agriculture industries will continue to power exports during 2021.

So far, local vehicle consumption in Mexico has slowed down after recovering in 3Q20, according to Valerio. “Auto sales in Mexico are showing divergence according to income segments and we are seeing that Mexico’s inequality gaps are growing.”

To conclude, Valerio highlighted the main events to watch out in 2021 that can hinder or benefit economic recovery in the country:

1Q21:

• Status of legal challenges to the new electricity reform
• Vaccination progress
• Banxico’s monetary policy announcement

2Q21

• Midterm elections
• 1Q21 GDP estimations
• Assessment of infrastructure

3Q21:

• 1H21 GDP assessment in the US
• 1H21 government revenue in Mexico
• Banxico’s monetary policy announcement
• Appointments at Chamber of Deputies
• Debate over 2022 budget

4Q21:

• Vaccination progress
• Trade balance results with the US
• Approval of 2022 budget