The Mexican economy faces headwinds

Since the signature of the Pacto por Mexico in December 2012, an agreement struck by the three main political parties, the country has witnessed a variety of reforms.

President Peña Nieto was efficient in securing cross-party support and big improvements were made in 2013. The government obtained approval for a landmark energy reform, bringing to an end the 75-year monopoly of state-owned Pemex and, by opening the oil and gas industries to private investment, free up the labour market. It also introduced competition in the telecoms sector. However, sluggish growth was reported in 2013 and during the early part of 2014.

The upturn in the Mexican economy began in the 2nd quarter of 2014 and GDP expanded by 2.1% last year. The pick-up in growth has been partly driven by stronger exports to the United States. Nevertheless, the freefall in oil prices has raised concerns that the energy reform could be impacted, as could government´s financials. Against this backdrop of headwinds, Coface expects moderate growth of 3.1% in 2015.

The energy reform adopted by the Mexican authorities was a great success. However its implementation is far from easy, given the trend of lower oil prices. The reform’s objective is to reverse Mexico´s 10 year decline in oil production, but deregulation of the energy market could be compromised if the drop in oil prices persists.

Currently, the impact of low oil prices on the economy seem to be manageable, because the Mexican economy is relatively well diversified and is benefiting from support factors (such as the automotive sector). Therefore the performance of the manufacturing sector and the recent depreciation of local currency have made budget adjustments easier.

Mexico’s economic outlook for 2015 points to an improvement in activity, notably due to the manufacturing sector’s performance which is benefiting from growing US demand.

A slight recovery in consumption is also expected, given the improved labour market and increased remittances. Inflation should abate, but the weaker peso could put upwards pressure on prices, given the impact on import costs.

On the supply side, the agro-food and textile-clothing sectors remain at risk. The agro-food sector is challenged by lower prices for commodities and its dependence on imported fertilisers, while depreciation of the local currency is raising production costs.

The textile-clothing sector is losing competitiveness to Asian products. In contrast, the automobile and pharmaceuticals sectors seem to be in a better shape. The robust growth expected in the US in 2015 will benefit the country’s car industry. Mexico is becoming a platform for selling worldwide and its production is expected to increase by more than 50% by 2018.