The Year in Finance
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The Year in Finance

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Sofía Hanna By Sofía Hanna | Journalist and Industry Analyst - Fri, 12/23/2022 - 09:30

After three years of pandemic, 2022 ends with high market volatility and a challenging perspective for the future. Central banks worldwide nearly simultaneously raised interest rates to respond to inflation throughout year. Many countries face the “ghost” of a recession as global economic activity slows down. Despite efforts to shield the most vulnerable groups, the poorest still bear a disproportionate share of the burden of high food and energy prices. 

 

On Mar. 25, Banxico announced that the interbank interest rate would rise 50 base points to 6.5 percent. By November, the annual variation rate was 7.8 percent, making the accumulated inflation in 2022 7.4 percent. Along with inflation, Mexico’s GDP continued to record minimal growth in September 2022 at 0.7 percent. Recovery remains stalled with critical inflationary pressures and the highest interbank interest rate since 2001. Central banks like Mexico’s Banxico have tightened monetary policies to contain inflation. Against this backdrop, the International Monetary Fund (IMF) urged central banks to invest in bringing inflation back to target to prevent inflationary pressures from becoming entrenched and inflationary expectations from unwinding; otherwise, their credibility could be undermined. However, different central banks are in different positions when it comes to the opportunity to reduce rates and the potential benefits of such policies. 

 

In May, President Andrés Manuel López Obrador introduced a plan to fight Mexico’s skyrocketing inflation, which highly affected the cost of basic food products such as milk, rice and bread. However, financial experts warned that this measure would not reduce inflation. In fact, the World Trade Organization (WTO) warned that extensive subsidies could influence production and trade, potentially worsening the economic climate and affecting global value chains, digital transformation and the response to economic and health emergencies. While not all subsidies are harmful, some have the potential to distort trade or investment by eroding the value of existing tariff bindings or other market access commitments. Subsidies distort prices and resource allocation decisions, altering the patterns of production and consumption in the economy, according to the OECD. Later on, Mexico’s Minister of Finance, Rogelio Ramírez de la O, presented a plan to fight inflation that would ask business people, food producers and retailers to maintain their prices stable until Feb. 28, 2023.

 

As high inflation becomes the new normal, experts forecast an upcoming worldwide recession. Mexico and Brazil, in particular, are in a precarious position, given their external debt and the rising cost of living. During BlackRock’s 2023 Global Outlook presentation, the group announced that the world has entered a “new regime” due to persistent inflation and output volatility. The current scenario calls for a new “playbook” of investment strategies for 2023, where more granular views are taken by focusing on sectors, regions and sub-asset classes rather than broad exposures. The great moderation is over and a new regime of higher macroeconomic volatility is playing out as the worsening trade-off between fighting inflation and the damaging consequences of these actions becomes clearer. The world has to either focus on growth or on curtailing inflation.

 

In Latin America, raising rates early on has helped keep exchange rates in check. Some are optimistic that the region will be able to avoid the crisis, despite the coming turbulence. However, a more significant global slowdown in 2023 will drag down Latin America’s economic growth, given the region’s trade links with the US. Under these circumstances, the OECD lowered its growth outlooks for some Latin American countries, including Brazil, Mexico and Argentina. “As a result of the weakening global demand, Latin American exports will lose steam, thus taking a toll on the main regional exporters as in the case of Brazil, Mexico, Argentina, Chile and Colombia. Beyond the lower global demand, the region will still face the monetary brake imposed by central banks to bring inflation down and close to the target’s upper range,” Alfredo Coutiño, Director for Latin America, Moody’s Analytics, told The Dialogue.

 

The current scenario for Mexico, according to Moody’s, shows that inflationary pressures will remain for the rest of 2022 but will subside in 2023. However, Moody’s inflation expectation is at 5 percent or slightly lower by the end of 2023, which is still above the target range. Growth could also be limited. “We expect that 2023 will see a return to 2 percent growth, as seen before the pandemic, resulting in stagflation,” said Merino. Despite these challenges, Moody’s sees less uncertainty in Mexico as the economy has performed well enough to maintain long-term inflation expectations largely due to Banxico’s policies, according to Lorenza Martinez Trigueros, CEO, Banco Actinver.

 

Two elements that were  very much present in 2022 were foreign investment and nearshoring opportunities. Industry leaders forecasted that investment opportunities from a rewiring global economy could increase thanks to Mexico’s proximity to the US. However, these investments would not be enough to change growth forecasts for 2023 or to reduce the risk of an economic recession, according to IMEF

 

While investments are ready to enter the country and could improve opportunities within Mexico, issues must be resolved, however. For that reason, companies from both Mexico and the US have asked Mexican President Andrés Manuel López Obrador to speedily address matters, such as the energy reform, to foment investment in Mexico, as mentioned by Daniel Becker, President of the Association of Banks of Mexico (ABM), during a press conference


Despite the global uncertainty being experienced worldwide, opportunities have opened up for new fintech and digital companies to enter the market and provide financial services that had never been seen before. As digital payments gain ground among consumers and businesses, new digital financial services are emerging to facilitate a multitude of economic transactions that seek to improve financial inclusion. As mentioned by Alejandro Villalobos, Managing Director, North Latam at Cumplo Mexico and MBN Expert Contributor, “What awaits us is a year of great changes in the non-banking financial sector and a great opportunity to integrate fintech into the country’s economic development landscape. Can we take advantage of it to its full potential?” 

Photo by:   Kelly Sikkema, Unsplash

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