Nothing to worry about?

The Mexican economy has maintained average GDP growth of +4% since 2021. The resilience of the manufacturing and services sectors, supported by domestic demand and foreign investment, has spurred growth. In 2023, Mexico's economic activity continued to expand, buoyed by a robust US economy, nearshoring, competition in the labor market and a healthy rise in wages. However,economic growth may decelerate in 2024, due to weaker US demand and the delayed impacts of monetary policy, with growth expected to slow to +2%.

In the short to medium term, the next Mexican administration will face substantial challenges from the deteriorating fiscal profile and the impact of US politics on Mexico’s industrial policy. Public debt stands at 53% of GDP, with risks of rising by +5pps this year due to Pemex's financial strain and increased social spending. Mexico is poised to reap significant benefits from nearshoring policies, having become the top trading partner of the US in 2023, surpassing China. However, rigidities in the energy and mining sectors and lack of sophistication and vertical integration in certain industries, such as electronics, semiconductors and batteries, may act as a constraining factor, as the state is unlikely to be able to meet the substantial investment needs and/or to attract enough foreign investors.

A gradual easing of monetary policy is expected. The Bank of Mexico (Banxico) commenced an easing cycle in the first half of 2024, but is keeping an eye on the exchange rate, which is going to depreciate mildly in the second half of the year with effects on imports of capital goods and commodities. The recent fiscal loosening in Mexico may also exert upward pressure on inflation, which has remained stable between 4.5% and 5% over the past 12 months i.e. above the target range of 2-4%. Banxico might need to maintain the policy rate above 10% for a longer period to mitigate inflation and consider only a modest reduction in interest rates in the second half of the year.

Property rights, judicial effectiveness and government integrity remain the areas with larger room for improvement due to a weak rule of law and arbitrary state intervention. These factors are expected to continue exerting pressure on the business environment. Political risk is deemed moderate. Drug trafficking continues to fuel violence, with homicide rates dropping for a fourth consecutive year in 2023, but still high. A conflict against drug cartels began in 2006, with security risks from cartel activities remaining elevated for businesses in areas where such activities are highest. Sporadic social unrest is becoming more common but unlikely to threaten government stability.

A still-weak exchange rate, location advantages, lower transport costs and the virtual disappearance of the wage gap with China provide scope for competition against low-cost producers from Asia. The tariff rate ranges from 0% to 35%, but the US-Mexico-Canada Agreement (USMCA) signed in July 2020 mitigates some foreign trade and payments risk. However, exploiting this potential will require significant investment in raising productivity. The government has pledged to promote capital spending on socioeconomic projects and strategic sectors like energy. Nevertheless, its erratic policy towards private investment will do little to boost growth significantly and mitigate investor caution.