Firms in Mexico Should Look Out for These Key Trends in 2022

After the historic 8.3 percent decline of the Mexican economy in 2020, its worst year since 1932, the country’s path of recovery has been uneven. According to my estimates, while 2021 is positioned to bring growth of 5.7 percent, Mexico’s GDP will grow by 2.4 percent in 2022, driven by exports, investment, and consumption. Although it will continue to recover, Mexico’s economy will not reach pre-pandemic levels until 2023.

Does Mexico still look attractive for multinationals? Absolutely. Will Mexico be an oasis of stability during Latin America’s volatile electoral season in 2022? The answer is maybe, if one compares the country vis-à-vis the electoral uncertainty that will impact investment in Brazil and Colombia, where left-leaning candidates Lula Da Silva and Gustavo Petro have a serious chance of winning. Against this backdrop of ongoing economic recovery and political uncertainty in Latin America, firms should be on the lookout in 2022 for a few key trends to stay ahead of the curve and make sure to win in the still attractive Mexican market vis-à-vis other emerging markets.

First, President Andrés Manuel López Obrador (AMLO) and his political project embodied in the ruling party Movimiento de Regeneración Nacional (MORENA), will expand their political clout across Mexico and maintain their leverage over economic policy. Indeed, AMLO and MORENA, which expanded their 2018 gains at the gubernatorial level last June, from six to 17 governorships, are likely to take that number to 22, as they are expected to win five out of the six gubernatorial races in 2022. The business, political, and economic implications of this likely scenario cannot be overestimated. First, by putting 22 governorships under their belts, AMLO and MORENA will have more leeway to coordinate federal and state economic policies and pandemic-related measures. This reality ahead of the 2024 presidential elections will make AMLO the most important decider since 1988, or “fiel de la balanza,” to use the late President López Portillo’s famous phrase about the overarching power of Mexico’s president. Second, AMLO and, most likely, the states run by MORENA are unlikely to shut down the economy. Hence, regardless of any real threat stemming from either the omicron variant or any new variant, Mexico will likely remain open and adopt less stringent measures to prop up the economy even if its healthcare system is overrun by new waves of hospitalizations.

On a related political trend, firms should also expect that AMLO will easily win the recall referendum that is poised to take place in April. Despite the fraught exchanges between AMLO and the electoral referee, Instituto Nacional Electoral (INE), over budgetary issues related to the recall referendum, AMLO and MORENA will prevail as this referendum is viewed as yet another political cudgel to hammer the opposition and to pave the way for MORENA’s presidential candidate in the 2024 elections. Make no mistake, the recall referendum will be won by AMLO, but firms should be paying attention to the opposition’s reaction to the referendum and how it organizes a pushback against AMLO’s steamroller electoral machine. In sum, the recall referendum can be used as a proxy to gauge the electoral coalitions for the 2024 presidential elections. Moreover, if the referendum takes place amid high electoral participation and AMLO wins it by a landslide, it will showcase that the opposition continues divided, without a clear policy platform that challenges the “Fourth Transformation,” and without a roadmap to elect a consensus presidential candidate for 2024. Thus, albeit good news for AMLO and MORENA, firms should put in their mid- to long-term strategic plans that, at least until 2030, MORENA will be at the top of Mexico’s political landscape.

Second, the economic recovery will continue to rely heavily on Mexico’s external sector. I expect Mexico’s exports to expand by 4.2 percent in 2022 on the back of high US demand for manufactured goods and food items. Although exports grew in 2021 by 19 percent YOY from January to November, worth US$446.5 billion, they still underperformed due to the supply chain disruptions, which particularly affected the key auto export sector. Auto exports faltered last year not because of the lack of demand but because of the microchip shortages, which led to auto export growth of only 2 percent YOY in 2021, after a 21 percent contraction YOY and 18 percent YOY, in Q3 and Q4 respectively. As supply chain disruptions slowly abate, companies should expect pent-up demand of manufactured goods. Not only auto exports, but also electronic devices and plastic items will greatly benefit from a still resilient US economy. Thus, exports will be the main engine of growth that would help Mexico’s GDP in 2022.

Third, firms should be expecting inflationary pressure above Banxico’s targeted rate (3 +/- 1 percent) in Mexico in 2022. Annual inflation increased to 7.37 percent YOY in December, driven by increases in food, services, and gas prices. This trend prompted Banxico on Dec. 16 to increase its policy rate from 5.0 percent to 5.5 percent, signaling further increases in 2022 by 25-75 basis points amid inflationary pressures. Inflation has been on the rise in Mexico, particularly since April 2021, as economic activity picked up steam. In the context of 2022, where supply chain disruptions should be expected at least until H2, coupled with high commodity prices, firms should factor in their pricing strategy an uptick in inflation. Likewise, they should expect that Mexico’s central bank will continue to tighten the monetary policy aiming to curb inflationary pressures under the stewardship of the newly designated governor, Victoria Rodríguez Ceja.

In this context, firms can use the following action plan to mitigate risks, meet their growth mandates, and stay ahead of the curve:

1. Identify the incoming power players at the subnational level and adjust your government engagement playbook considering that AMLO and MORENA will expand their control in 2022.
2. Continue prioritizing the northern and manufacturing states, as well as industries such as auto, electronics, and machinery, as these states and industries will greatly benefit from pent-up demand as supply chain disruptions slowly recede.
3. Use scenario planning to adjust your pricing strategy, as inflation is poised to remain above Banxico’s targeted rate throughout 2022.

Mexico’s economy could potentially grow more if regulatory uncertainty stemming from government policies, such as the controversial electricity reform, becomes a relic of the past. But as AMLO and MORENA have shown, they are unlikely to change course at the same time they continue to be the dominant political force in the country. Firms will continue operating and growing in Mexico, albeit in a moderate way, as the country continues to be a promising market amid emerging markets; however, its potential is limited in no smaller sense by the “Fourth Transformation” government.