Significant Global Uncertainty to Hinder Mexico’s Growth
Home > Trade & Investment > News Article

Significant Global Uncertainty to Hinder Mexico’s Growth

Share it!
Pedro Alcalá By Pedro Alcalá | Senior Journalist & Industry Analyst - Thu, 05/12/2022 - 12:04

Mexico is going through a complicated time as its slow economic recovery has been hindered by global challenges and price pressures. The sobering realities that surround the country’s economy must be weighed against a landscape of prevailing anxiety and uncertainty in the global markets, according to some of the country’s most renowned economic experts. 

Mexico’s ongoing economic recovery is going through a difficult phase, said Adrián de la Garza, Chief Economist, Citibanamex. Pressure is mounting on a number of key supply markets, which include semiconductors, grains and various other commodities. All of this poses a number of significant risks that could decrease Mexico’s growth forecasts or cast a shadow of doubt over those being too positive in their predictions. International circumstances are complicating an already complex national situation. “The recovery outlook is complicated due to the Russia-Ukraine conflict and the recent lockdowns in China. From the beginning of the geopolitical conflict, we saw increasing prices of raw materials needed for production,” said de la Garza.

The raising of US interest rates will also heavily influence Mexico’s growth capabilities, according to Alejandro Padilla, Chief Economist and Managing Director of Research, Grupo Financiero Banorte. Padilla believes that these rates will continue to rise at a comparatively accelerated pace throughout 2022, despite the US economy demonstrating its resilience and flexibility through high rates of job creation in the last few months. Padilla believes that other central banks around the world, including Mexico’s, are likely to follow the US Federal Reserve’s cue and even go beyond it, raising interest rates even more aggressively. In this context, Mexico’s healthy export markets must play a role in cushioning some of the rougher effects of these indicators. “Exports will be the main driver for economic recovery. Mexico has to analyze the current environment to see where it can have a competitive advantage. The opportunities to grow are there. Mexico has a lot of potential, not only geographically but also demographically,” said Padilla.

Mexico will likely follow the global trend of weak growth rates that spell out a longer and more drawn out economic recovery process following the pandemic, said Jessica Roldán Peña, Chief Economist, Casa de Bolsa Finamex. Banxico’s ability to maneuver beyond the aggressive agenda of the US Federal Reserve is quite limited, she added. “Central banks in diverse economies, including Mexico, are expected to raise interest rates to maintain inflation at acceptable levels. The challenge for the domestic economy this year is for internal demand to remain steady and afloat and, in that sense, we do have the good news of consumption having returned to pre-pandemic levels.” The weakness of Mexico’s growth rate is not necessarily linked to Mexico’s current government administration, said Roldán, because it has been an issue for the country for the past 30 to 40 years. During that period, Mexico struggled to significantly go beyond an annual growth benchmark of 2.5 percent. 

The war in Ukraine is impacting some unexpected commodities such as ammonium sulfate, an essential component of commercial fertilizers, according to the analysis of Rodrigo Mariscal, Head of Economic Planning Unit and Chief Economist, SHCP. This, in turn, is impacting Mexico's growth. “Mexico is an important importer of fertilizer commodities; 25 percent of this one comes from Russia, for example, so the recent economic plan of the government seeks to protect that. If the conflict continues or escalates, then the plan contemplates an effort to increase the production of grains in the country.” 

Mexico’s economic plan also contemplates an adjustment of the Federal Roads and Bridges (CAPUFE) highway tolls and of rail transportation fees. Through these changes, Mexico’s growth capabilities will continue to depend on the degree to which the country can compete as a commercial partner as the US-China relationship continues to transform. “There is a clear intention from the US and Latin-American countries to compete against China in offering the highest national and regional added value,” said Mariscal.

The world “has become more regional than global after the pandemic,” said Carlos Fiorillo, Managing Director for Latin America Business & Relationship Management, Fitch Ratings. This fact underscored Mexico’s bet on the nearshoring boom and will positively impact export markets, continuously increasing the country’s growth rate and the pace of its economic recovery. 

An issue that could hinder Mexico’s growth rate is the political uncertainty surrounding investment in the energy sector. “The recent government policies create uncertainty in the energy sector and the industry in general, which is not favorable in the short term for investment,” said de la Garza. While Mariscal minimized the impact of this uncertainty, Roldán warned that it could have a widespread effect since the energy sector “might seem small in terms of investment percentage but its impact is economically transversal.”

You May Like

Most popular