Will Mexico’s economic rebound be temporary?


“Facts, not words” – this is the slogan Mexican President Andrés Manuel López Obrador (AMLO) chose to promote his major September 1 address to the nation. Government ads on social media touted 6% economic growth. But a closer examination of the facts does not inspire optimism about the future of the Mexican economy.

This year will indeed 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 by 8.3%, while in 2019, AMLO’s first year in power, it shrank by 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 past years, although growth expectations for next year (4%) are 1% higher than market consensus. But there’s a pleasant surprise in the package in the form of two standout features, courtesy of new finance minister Rogelio Ramírez de la O.

One is a series of amendments aimed at improving and securing 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 the need to move away from fiscal orthodoxy and manage budget deficits of 0.4% and 0.3% for this year and next. . While both of these measures point in the right direction and improve fiscal buffers, 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.

Although Mexico’s macroeconomic fundamentals still appear sound, they will not remain so indefinitely. Vulnerabilities are mounting, including an economic recovery that is overly dependent on the United States, increased poverty levels and higher public debt – in an environment characterized by high uncertainty and the prospect of rising interest rates resulting global efforts to contain inflation.

CONEVAL, an independent technical consultancy 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 lost access to education and the number of those without access to health care rose by 15.6 million to 35.7 million. The main factor that explains this dramatic deterioration in access to care at the worst possible moment is the end of the popular insurance program (Seguro Popular) which had provided access to care for 52 million Mexicans. Its replacement, which is part of AMLO’s 4T project (“4T” stands for a potential “fourth transformation” of the Mexican economy), only covers 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 fall 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 posted a loss of $18.3 billion, nearly double that of the previous year. Losses soared again to $23 billion in 2020.

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

Mexico’s current level of debt to GDP ratio 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 on lives and jobs. (Mexico only allocated 1.8% of its GDP, while the Latin American average was 8.5%).

The pre-existing firewalls that kept the economy robust 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 for natural disasters — have been completely depleted, leaving Mexico for the first time in years without financial safety nets. Although tax revenues have increased since 2013, reaching 16.5% of GDP in 2019, they remain 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 resolution of disputes dating back several years.

The current Minister of Finance now finds himself in a position of strength, enjoying a power that stems from his proximity to the President as well as 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 the time being. Based on recent meetings with investors, it seems that Ramírez de la O is determined to have a lot more 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 the fiscal sustainability of this public company, would be very timely. So would more concerted efforts to ensure investment security.

With half of the term of the AMLO administration already over, the current choice facing the Mexican economy is whether to move towards an urgent structural reset or remain caught in an unsustainable paradox. This paradox is characterized, on the one hand, by an absence of growth, a reduction in productivity factors and a deterioration of the security and institutional environment – and, on the other hand, by an increase in spending on discretionary social programs, financially unviable pet projects and ideological nonsense in the energy sector. . The answer to this paradox will have enormous consequences on poverty, health, education, employment, infrastructure and productivity, as well as on 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.

Keywords: Andrés Manuel López Obrador, economic growth, Mexico, poverty and inequality

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


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