4 Economic Challenges Mexico Faces in 2018

Even with the disastrous crude oil crash in 2015, Mexico's economy still performed well in 2016. However, growth slowed in 2017, and the Mexican Central Bank is revising its growth estimates for 2018 and 2019. 

According to Mexico's national statistics institute, the second quarter of 2018 saw the rate of growth in Mexico's economy contract, due to the cumulative effect of declining production in the oil, agricultural and industrial sectors along with the prospect of a radical leftist regime change set to take power in December. The quarter was projected for a 0.1% contraction in GDP, but the revised numbers now show the rate of decline actually doubled, down a seasonally adjusted 0.2%, compared to the previous quarter.

A number of service sectors, including commercial activity, transportation, financial and media, which experienced a 1% expansion in the first quarter of 2018, grew just 0.2% in the second quarter. Industrial sectors, such as mining, construction and manufacturing, declined by 0.3%. Meanwhile, the growth rates of the agriculture, livestock and fishing industries took a far more significant hit, with a 2.1% decrease.

However, the growth of the Mexican economy is still projected to expand faster in 2018 than in 2017, due largely to accelerated spending that happened before the July 1 presidential election. For 2018 and 2019, economists still expect to see increases of 2.2 and 2.1%, respectively, according to an analysis released in a survey by Citigroup. However, nothing is certain, and some analysts believe there's ample reason for pessimism, such as trade tensions and current political instability concerning the North American Free Trade Agreement (NAFTA) and the impending policy changes of the new president. The International Monetary Fund (IMF), for example, recently downgraded growth forecasts for Mexico in 2019.

In August 2018, the incoming administration of Mexican president-elect Andrés Manuel López Obrador (also known as AMLO) stoked a new round of economic uncertainty when he announced his intention to hold a public referendum over whether to cancel the upcoming $13 billion (USD) construction of a new international airport for Mexico City, the largest city by population in the Americas. The project was to be the largest infrastructure project of the previous president, Enrique Peña Nieto. AMLO has stated that in addition to mounting environmental concerns, the planned airport is far too expensive and is embroiled in far too many layers of corruption.

In addition, AMLO has promised to conduct a review of already-awarded oil contracts for evidence of corruption. He also made headlines by appointing an industry newcomer to lead the state-owned oil company Petróleos Mexicanos (Pemex), the largest oil producer in the country. AMLO has also promised to stop any new oil auctions for the next two years. However, these changes could end up being a positive development; Pemex is currently over $100 billion in debt after 13 consecutive years of declining output, rampant and violent fuel theft, and international scandals.

AMLO is the first leftist president Mexico has elected in decades. He has announced his intention to invest $4 billion (USD) into the oil industry, but as might be expected, he has also promised to expand spending on social programs for marginalized communities. He intends to finance these initiatives, not by increasing taxes, but by increasing government efficiency and cracking down on deeply entrenched institutional corruption – a remarkably ambitious notion in the infamously corrupt political environment of Mexico. Many critics and economists say it won't be possible.

The election of AMLO also appears to have had a dramatic effect on Mexican consumer confidence and spending. Mexico’s consumer confidence index soared to its highest point in more than a decade after AMLO's July victory, leaping to 105 from 89.8 the month before, according to Mexico's statistics agency. The mark was the largest one-month increase since 2001 and far outpaced a 90.4 median forecast of eight analysts surveyed by Bloomberg. Whether this trend continues, however, remains to be seen.

Mexico's government is often described as institutionally inclined toward ruthless dishonesty and an inability or unwillingness to seriously take on the drug cartels. It is often a very dangerous place if tourists get lost in the wrong neighborhood, because they may face as much danger from the police force as they do from street criminals and narco-terrorists.

Indeed, Mexican government corruption is rampant and costly. The Mexican Institute for Competitiveness calculated that each year, corruption costs the country between 2 and 10% of its GDP, reduces foreign investment by 5%, and wipes out 480,000 jobs from small and medium-sized businesses. The situation forces any attempt at legitimate meritocracies to take a back seat, which greatly depletes Mexico’s skilled labor force.

Entrepreneurs take the corruption in stride, with 60% saying that corruption is part of the cost of owning a business. Even when corruption cases get into the judiciary system, fewer than 20% result in guilty verdicts, compared to almost 90% in the United States.

Despite its deeply entrenched problems and uncertain political future, the Mexican economy will continue to benefit from its close ties to the United States, which is still experiencing record-breaking growth. In addition, on September 30, 2018, Canada, Mexico and the United States struck a deal to revise the NAFTA agreement. Dubbed the United States-Mexico-Canada agreement (USMCA), the new accord protects tariff-free regional trade and is expected to increase business confidence in Mexico, as the country will maintain premium access to American exports. However, several notable changes were made to NAFTA, including a mandate that a portion of car production be done by workers that are paid over USD $16 per hour – a huge number when you consider the minimum wage in Mexico is currently less than $5 per day.