Economic Recovery in Mexico Slows Down
Home > Policy & Economy > Analysis

Economic Recovery in Mexico Slows Down

Photo by:   Westark
Share it!
Paloma Duran By Paloma Duran | Journalist and Industry Analyst - Fri, 01/21/2022 - 09:51

The Mexican economy continues to recover but a variety of factors are hindering growth. Banxico has revised downward the country’s GDP growth for 2021, following a contraction of 0.43 percent in 3Q21. The projection now stands at between 5 and 5.7 percent for the year. Low domestic consumption and the emergence of new obstacles, especially new reforms that are expected to further reduce investment, put the country’s recovery at risk.

"If the country does not manage to change the investment rate by giving signs of certainty, we believe that there will be a permanent loss and we will never recover the level of employment prior to the pandemic. A radical change would be necessary to attract more investment and achieve higher growth rates. This can be done but with major policy changes," says Carlos Serrano, Chief Economist, BBVA Mexico, speaking at a conference on Mexico’s economic situation.

The estimates suggest that a complete recovery is far from likely because not all jobs lost during the pandemic have been recovered, investment is declining and the COVID-19 virus remains persistent, along with an accompanying chip shortage that is hampering industrial production. "The economic recovery weakened in the third quarter due to a double effect: acceleration of the pandemic and worsening of the semiconductor shortage, which had a significant cost in internal production," says Alfredo Coutiño, Director of Analysis for Latin America, Moody's Analytics.

Formal job creation, however, has accelerated and is actually better than expected. The increase is mainly due to the labor adjustment that occurred after the implementation of the Labor Reform, which sought to eliminate outsourcing. “The reform has had positive effects on permanent employment. In the short term, it implies greater job stability for workers and in the long term it will represent an improvement in retirement conditions and greater access to the financial system,” said BBVA in its 4Q21 report on Mexico’s situation. Despite the improvements in employment, high levels of labor informality and underemployment persist.

Regarding foreign investment, the levels reached in 3Q21 are below expectations, after growth of 11 percent in 1H21. According to experts, investment is expected to recover in 2022 as a higher percentage of the population is vaccinated, which is expected to have a favorable impact on household and company activities. As of Jan. 4, 2022, 149.38 million vaccine doses have been administered, which represents 82.9 million people in Mexico. According to Minister of Health Jorge Alcocer, 89 percent of those vaccinated have already received a complete vaccination scheme. That being said, experts consider that vaccination and economic recovery are going at different rates as the country remains vulnerable to the pandemic despite having a higher vaccination rate.

In addition, the possible implementation of reforms in the electricity and lithium markets presents a new obstacle to future investment. “The cancellation of clean energy contracts, permits and certificates, as established in the transitional reform in question, would send a new sign of uncertainty that we estimate would reduce investment,” BBVA says in its report 4Q21 report.

Reforms: Obstacle for Investment

The Electricity Reform is undermining the confidence of international investors in Mexico, which could also lead to a series of international lawsuits, says Claudio Rodríguez, Partner at Holland & Knight. “Now, we are talking about electricity, the winding up of federal energy regulatory bodies, indirect expropriations of power generation facilities (nationalization) and the unilateral cancellation of lawful permits and private agreements (…). Tomorrow, it might be another topic.”

Additionally, automotive executives have noted that  the lack of renewable energy sources in the reform proposal will impact investment as the industry globally is looking to neutralize CO2 emissions. “If Mexico cannot guarantee cleaner carbon emissions, foreign auto plants are less likely to choose Mexico for production,” an industry executive who asked to remain anonymous told El Universal.

The mining sector has also expressed concern about the Electricity Reform, which includes the nationalization of lithium. “If Congress approves President López Obrador's Electricity Reform that seeks to give the government exclusive control of strategic minerals, investment in mining exploration will be practically null,” CAMIMEX says. In addition, the reform will lead to reduced investment in energy projects within mining, since it forces companies to buy energy from CFE, which is obtained from fossil fuels.

Edmond Grieger, a member of the Energy Commission of the International Chamber of Commerce of Mexico, said that the halt in foreign investment is not a future problem but a current issue. "We already see companies making decisions to invest elsewhere. Many companies are deciding to transfer their investment portfolios to new renewable energy projects in Central and South America," Grieger said during a press conference. The Chamber believes that if the reform is approved, it would have a negative impact of at least US$44 billion on private investments in the country's electricity sector.

Another factor affecting the country's recovery is PEMEX. In recent years, PEMEX has benefited from reductions in its ISR rate, tax incentives and equity contributions. However, these actions have affected public finances. According to BBVA, the government's financial package has helped to reduce PEMEX's net debt considerably. However, a change in the company's business model is still required that considers increasing private investment and reducing refining activities, says the bank.

Potential for Improvement

Despite the multiple challenges, experts say that new factors will have a positive impact on the Mexican economy. One was the reopening of the border with the US for non-essential travel, which was expected to reactivate the economy in both countries. However, caution has crept in after the US Federal Reserve warned that the US economy is slowing down, which could affect Mexico, as well.“There is no questioning the significance of Mexico’s trade position with the US. To be successful, cross-border logistics must have intimate knowledge of the security challenges, economic environment, and regulatory issues in both countries. Most important, however, is keeping up to date on US and Mexican customs regulations. What makes this challenging is that customs regulations are ever-changing with little, if any, time to prepare,” Said Carlos Godinez, Vice President, Sales and Marketing, Transplace.

Experts point out that the 2022 Economic Package, which contemplates a high investment budget mainly for the Felipe Ángeles Airport, the Mayan Train and the Dos Bocas refinery, will help in the reactivation of the economy since it will indirectly benefit the companies that will participate in the projects. Minister of Finance Rogelio Ramírez de la O says the government decided to prioritize the projects because last year they played an important role in mitigating the impacts of the pandemic in southern Mexico. In addition, some experts believe that these projects will have a fruitful 2022, especially as the Dos Bocas and Felipe Ángeles Airport are expected to be completed. "The biggest restricting factors that occurred due to the refinery’s construction have already passed. We believe that 2022 will be a good year for the industry and the Dos Bocas environment in general,” said  Pablo Nieto, Vice President of Operations, Roca Ventures. Nevertheless, the Economic Package does not contemplate other large infrastructure works, which could mean a drop in public investment, said Alejandro Saldaña, Chief Economist, Grupo Financiero BX+, in an El Financiero article. Adds Carlos González, Director of Analysis at Monex, in the same piece: “The outlook for the PEF 2022 may be much more challenging next year, since it will be quite limited. The priority will be to maintain healthy public finances. In addition, greater transfers of financial support to PEMEX are expected.”

The Ministry of Economy says that USMCA has been a powerful tool for the country’s economic recovery and the expectation is for this to continue. “USMCA will greatly benefit Mexico. No sector of the Mexican economy has benefited more from USMCA than manufacturers. The treaty  attracted a significant amount of FDI to help expand productive capacity and ramp up exports,” said Ana López, Executive Vice President and General Director, AmCham.

However, there have already been disputes related to the treaty, which are expected to increase due to the energy reform. Claudio Rodriguez, Partner, Holland & Knight, considers the bill “incoherent, illogical and impractical.” “It would lead to a paralysis of the energy industry in Mexico. Indeed, as originally proposed, it means that with immediate effect, all permits and contracts in the hands of private companies are null but without a definition of a clear implementation path.” Similarly, Sean McCoy, Director, Edison Energy, said the bill should not be approved as it violated many principles of free trade agreements such as USMCA.

While there is no doubt the country’s economic recovery will continue, its pace will depend on the certainty provided by the government and the efficient allocation of budgets.“Rule of law is important to foster long-term investment, especially for SMEs. If we can give strong certainty to investors, economic development can truly kick off,” said Francisco Lira, CEO, Banco Sabadell México.  

Photo by:   Westark

You May Like

Most popular