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Focus on Mexico: Another Election Hanging Over Mexican Economy

July election adds uncertainty to country’s industrial marketplace

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In 2017, Mexico was dealing with the fallout of the 2016 U.S. Presidential Election, particularly given President Donald Trump’s rhetoric toward the country through and after the November vote. 

A presidential election is again dominating the news in Mexico, but this time it is the Mexican people that will go to the polls. Current President Enrique Pena Nieto is ineligible to run again, leaving an open race between three major contenders for the office. The favorite is Andres Manuel Lopez Obrador, a candidate who is relying on some of the anti-establishment sentiment that ushered in Trump and other successful candidates around the globe.

“Apparently he’s from the hard left. He has some outdated ideas that look like they are in again,” says Jesus Canas, an economist with the Dallas Fed who analyzes the Mexican economy. “I don’t know if we should be worried about him if he wins.”

The election is being described as the largest in the country’s history, with the presidency, 10 state governors’ races and 30 local congressional seats to be determined. Somewhat surprising, the ongoing trade issues with the United States are not front and center, with crime, corruption and inequality more pressing matters to much of the electorate. But it is also adding some uncertainty to the economy, something that’s decidedly not needed.

For the industrial economy, Mexico has had to overcome that drag for the past year. The Mexican economy slowed considerably in the second half of 2017, in part because of the concerns over the future of NAFTA and U.S.-Mexico relations. GDP declined to 1.5 percent in the fourth quarter. 

That is expected to reverse this year. Banco de Mexico forecasts GDP in the 2-3 percent range this year, and slightly better than that in 2019. Manufacturing has largely held up well despite the inflamed rhetoric, growing 2.9 percent compared with the prior year. 

The story was even better for ferrous metals, with steel-consuming manufacturing sectors such as transportation and machinery all showing high single-digit growth last year, reports the World Steel Association. Light vehicle production reached a new high of 3.9 million vehicles in 2017, a 3.5 percent gain over 2016, while appliance production increased 4 percent to 753,000 units.

While the economy is forecast to grow again in 2018, “We’re expecting the automotive market to be more stable in the next couple of years before it starts to grow again,” says Thais Terzian, a consultant on Latin America for CRU. 

After a down year for energy, the market is on the upswing, which is good for the oil-producing region of the country. “Drilling should be more profitable in the coming years, which should help the country as a whole,” she says.

However, this is one area where the election results could hamper growth. “The energy sector continues to be one of the best opportunities. Unfortunately, recently the frontrunner has said he will redirect energy efforts from exploration to services. That’s really worrying,” says Canas. 

The big headwind on the Mexican economy in 2017, and continuing into this year, is construction. Investments from the public sector have slowed, as the government has been going through a restructuring that has put a curb on spending. The private sector has followed suit with lower levels of investment. According to the WSA, construction spending fell 1.1 percent year over year in 2017, driven by a 10.3 percent decline in infrastructure spending.

Despites its forecasts for GDP growth, Banco de Mexico acknowledges some significant downside risks to the economy. The most notable among them is the iffy state of U.S.-Mexican trade relations. 

“The main downward risks to economic activity are delays in NAFTA renegotiations or an unfavorable outcome for the Mexican production sector. In particular, an agreement that would lead to a new pattern of trade relations that affects the formation of global value chains could hurt not only growth in the short term, but also the long-term growth potential,” national bank executives wrote in its most recent quarterly summary. 

Conversely, it concludes that a favorable resolution to NAFTA has the potential to reinvigorate investment, possibly including sectors that had been previously excluded from the agreement.

Canas says such a change would be welcomed by the Mexican production industry. “When you look at the hard data, you see a significant drop in foreign direct investment in manufacturing. That is consistent with what we’re hearing from our contacts in manufacturing. They are holding some of those investment plans.”

Over the very long term, Mexico would prefer to move toward a more domestic consumption-based economy, as most of the world’s advanced economies have done. “It’s the model countries are trying to emulate. Mexico is a developing country, so there’s still a long way to go,” Terzian says.

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