Will Mexico’s economic rebound be temporary?



“Facts, not words” was the slogan that Mexican President Andrés Manuel López Obrador (AMLO) chose to promote his great September 1 speech to the nation. Government social media ads touted 6% economic growth. But a closer look at the facts does not suggest optimism about the future of the Mexican economy.

This year will see an economic rebound of around 6.3%, one of the strongest in Latin America. But “recovery” might be a more appropriate term than “growth”. In 2020, the economy fell 8.3%, while in 2019, AMLO’s first year in office, it shrank 0.1%. By the end of 2021, economic growth during the current administration is expected to be -2.4%, still in negative territory.

Last week, the AMLO government presented its fourth annual economic package to Congress. Its macroeconomic assumptions show only slight changes from previous years, although growth expectations for next year (4%) are 1% above the market consensus. But the package contains a pleasant surprise in the form of two remarkable features, courtesy of the new Minister of Finance Rogelio Ramírez de la O.

One is a series of changes that seek to improve and secure tax collection by closing loopholes and restricting discretionary interpretations of several tax laws. The other is the recognition, for the first time in the administration, of a need to get out of budgetary orthodoxy and to record budget deficits of 0.4% and 0.3% for this year and the next year. While both measures point in the right direction and will improve fiscal margins, their effects will fall far short of the structural changes that the Mexican economy desperately needs to lay the foundations for robust and sustained growth.

While Mexico’s macroeconomic fundamentals still look strong, they won’t stay that way forever. Vulnerabilities are mounting, including an economic recovery overly dependent on the United States, increased poverty levels and higher public debt – in an environment characterized by high uncertainty and the prospect of a resulting rise in interest rates. global efforts to contain inflation.

CONEVAL, an independent technical council that measures poverty, recently published its findings for 2018-2020. These show that the number of Mexicans living in poverty increased by 3.8 million to a total of 55.7 million, while extreme poverty increased by 2.1 million to 10.8 million. An additional 900,000 Mexicans have lost access to education and the number of those without access to health care has increased by 15.6 million to 35.7 million. The main factor behind this dramatic deterioration in access to health care at the worst possible time is the end of the popular insurance program (Seguro Popular) which had provided access to health care to 52 million Mexicans. Its replacement, which is part of AMLO’s 4T project (“4T” means a potential “fourth transformation” of the Mexican economy), covers only 34 million.

Given the broadest measure of public debt used by the Ministry of Finance, Mexico’s debt-to-GDP ratio fell from 44.9% in 2018 to 54.7% in 2020, although it is expected to drop to 51% in 2021 and 2022. The oil company Pemex is the most indebted in the world, with 110 billion dollars of outstanding financial debt. The company’s annual losses have worsened since 2019, when it recorded a loss of $ 18.3 billion, almost double that of the previous year. Losses hit $ 23 billion again in 2020.

Oil production has also been steadily declining – last year Pemex’s oil production was 1.61 million barrels per day (MBPD). This is a marked drop from the early 2000s, when the Cantarell oilfield increased production to 3.4 MBPD. But that represents a deterioration even from the smaller 1.8 MBPD the company produced in 2018. Pemex’s response to its precarious position and the deterioration of its credit rating has been to build a new refinery, regardless of the costs. financial and environmental concerns, and to terminate its rating. contract with Fitch, one of the three largest rating agencies. Meanwhile, budget support to Pemex has totaled nearly 2% of GDP over the past three years.

Mexico’s current level of debt to GDP is manageable and certainly one of the lowest among OECD countries, especially after its fiscal response to the pandemic – which was almost non-existent, imposing a huge cost in lives and jobs. (Mexico allocated only 1.8% of its GDP, while the Latin American average was 8.5%.)

The pre-existing firewalls that kept the economy strong and protected it from severe shocks have evaporated. Much of Mexico’s stabilization fund was spent even before the pandemic. Since then, all of the country’s trust funds – including those earmarked for health emergencies, but also natural disasters – have been fully depleted, leaving Mexico for the first time in years without financial safety nets. Although tax revenue has increased since 2013, reaching 16.5% of GDP in 2019, it remains far from the OECD average of 33.8% and below the Latin American average of 22.9%. Recent improvements in tax collection, while positive, are limited and rely on ad hoc dispute resolution dating back several years.

The current Minister of Finance is now in a position of strength, enjoying a power that stems from his proximity to the president as well as from the political choices he made in the economic package. This will certainly give him more leeway, but just enough to stabilize the country’s finances for now. From recent meetings with investors, it appears Ramírez de la O is determined to have a much bigger say in Pemex. It’s good news. A new strategy led by the Ministry of Finance, promising to provide coherence and a much needed path to fiscal sustainability for this state-owned enterprise, would be timely. The same would apply to more concerted efforts to ensure the security of investments.

With half of the AMLO administration’s mandate already over, the current choice of the Mexican economy is to move towards an urgent structural reset or to remain trapped in an unsustainable paradox. This paradox is characterized, on the one hand, by a lack of growth, a reduction in productivity factors and a deterioration of the security and institutional environment – and, on the other hand, an increase in spending on discretionary social programs, financially unsustainable pet projects and ideological nonsense in the energy sector. . The response to this paradox will have enormous consequences for poverty, health, education, employment, infrastructure and productivity, as well as the future well-being of more than 126 million Mexicans.


Rubio is Professor of Practice at the School of Public Policy at the London School of Economics (LSE) and Senior Advisor at McLarty Associates. Rubio is a former Senator from Mexico and a former Deputy Minister of Foreign Affairs, Social Development and Finance.

Key words: Andrés Manuel López Obrador, Economic Growth, Mexico, Poverty and Inequalities

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The views expressed in this article do not necessarily reflect those of Americas Quarterly or its editors.


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