Mexico: Pillar Economy for the LAC RegionBy Paloma Duran | Wed, 08/10/2022 - 12:15
Regional data shows that Mexico is positioning itself as one of the strongest economies in Latin America and the Caribbean in 2022 and that it is much better prepared to face the social consequences of global problems, such as inflation. Even though the country’s political landscape seems uncertain, experts say that the country will remain one of the safest jurisdictions in the world.
The International Monetary Fund (IMF) recently revisited its economic growth projection for 2022 for Latin America and the Caribbean (LAC). The region's GDP is now expected to grow 3 percent in 2022 compared to the 2.5 percent forecast in April. IMF said this will be thanks mainly to the large economies of the region, including Brazil and Mexico.
IMF expects the Brazilian economy to grow 1.7 percent in 2022 and 1.1 percent in 2023, while its previous forecast showed a 0.8 percent and 1.4 percent advance, respectively. Projections are much better for Mexico, albeit only for this year. For 2022, the country is expected to grow 2.4 percent, against a previous 2 percent forecast. For 2023, expectations show a 1.2 percent growth, while the previous forecast stood at 2.5 percent.
“Mexico was one of the few economies that improved its outlook for 2022, as the GDP forecast rose from 2.0 percent to 2.4 percent, which is understandable tied to the good results of the first two quarters of the year,” said Marcos Daniel Arias, Monex Analyst.
Despite these good news from IMF, the new forecast fell short of the 3.4 percent projection rate given by the López Obrador administration regarding its 2022 macroeconomic estimates. Experts explained that the new projections consider a possible global recession, in light of the ongoing COVID-19 pandemic and high inflation. Monetary policy has tightened globally and tensions have increased in Eastern Europe due to the war between Ukraine and Russia.
For 2023, IMF lowered its growth projection for the LAC region from 3 percent to 2 percent due to a further slowdown in the US and European countries that will affect the entire world, which was also the reason behind Mexico’s setback from 2.5 percent to 1.2 percent. Mexico’s results will be impacted by the performance of its main trading country, the US, which has a growth projection of 1 percent for 2023.
Although Mexico will have a more difficult year economically in 2023, the situation is much better than in other countries that, due to economic pressures, have faced social discontent. For instance, inflation is causing massive protests in Argentina, Ecuador and Panama. In the latter, teachers' unions went on strike to protest the rising cost of living, food, oil and medicine. Indigenous groups and unions have also joined the protests. For days, protesters blocked Panama City and major highways, causing supply chain disruptions. Experts assure that Panama’s key sectors are working at below 50 percent of their capacity, which means losses of US$500 million.
Although there were negotiations with the government of Laurentino Cortizo, protests continue as demands consider other factors like increasing public spending. However, protests are now expected to end after the government agreed to reduce the total cost of the basic food basket by 30 percent.
The situation is expected to move beyond these countries as challenges are region-wide. "It is really not a question of whether it will spread to other countries, but when," says Sergio Guzmán, Director, Colombia Risk Analysis. "The price of fuel is an anchor for the entire economy: if fuel increases, it has a direct impact on all kinds of prices."
Mexico, however, will not experience a similar situation since it is much better prepared to face these economic and global challenges. According to FrontierView's Latin American Social Stability Index, which considers the level of political polarization, the level of inequality and poverty, current economic conditions and satisfaction with the government, Mexico is the country with the greatest social stability. Consequently, it is unlikely that Mexico will experience a wave of protests like Panama, which ranked as the third least stable country in the index. Still, Mexico will not face these challenges unscathed.
Faced with growing pressure from high inflation, President López Obrador recently launched the Deficit and Inflation Package (PACIC), which seeks to counter this problem by controlling the prices of 24 basic items through different production programs and the participation of private companies. However, inflation continues to hit Mexican families. The National Consumer Price Index (INPC) currently stands at 8.15 percent, a level not seen in 22 years. Experts believe that the inflation issue will continue to tighten the country's monetary policy for the remainder of the year, Forbes reported.
Regarding political stability, although the situation in Mexico has been highly criticized, especially when it comes to López Obrador’s proposed reforms, this is not a phenomenon exclusive to Mexico. Center-left reformists have gained ground across the region, with recent victories scored in Mexico, Argentina, Chile, Peru, Honduras and, most recently, Colombia. Most of these countries have proposed various nationalist reforms that seek to privilege state companies and the population over private companies.
The most polarized proposals in Mexico have been the energy, labor, mining and electoral reforms. Although several experts point out that these reforms show the high political uncertainty that Mexico is experiencing, others say that Mexico continues to be more stable than other LAC countries.
“The Mexican government’s policies obviously have an impact on industries as they make Mexico less attractive from an international perspective. However, these are not only being implemented in Mexico but also in other countries in the region such as Peru and Chile. Still, I think that Mexico has numerous opportunities compared to other countries, especially regarding key industries such as mining, so it will still be relevant," Adam Webb, Director of Mine Supply, Metal Focus, told MBN.
For the rest of 2022, LAC countries are expected to continue to grapple with the war in Ukraine, high inflation, tighter economic conditions, slowdowns in trading and social unrest. Meanwhile, Mexico, together with Brazil, will remain the political, social and economic rocks of the region in the short term.“Countries like Mexico are considered well-established jurisdictions, so they will continue to be considered safe investment destinations in the long term, even if the situation worsens. Also, since it is considered a safer investment option than Russia due to the Russo-Ukrainian war, part of the investment pool could end up in Mexico. As a result, investment is expected to remain strong this year and beyond,” said Webb.