2018, a dangerous year for Mexico's Economy

Experts talk about the main events which may impact Mexican economy and forecast uncertainty and volatility in the financial market
Mexican Stock Exhcange - Photo: Pedro mera /XINHUA
Rubén Migueles
Mexico City
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Talking about economics, the current year will be more complicated than its predecessor for Mexico. This is due to events which will generate uncertainty and volatility in the production activities of the country, according to several experts.

The main challenges Mexico will have to face this 2018 that will keep the market in suspense are the renegotiation of the North American Free Trade Agreement (NAFTA), the impact of the tax reforms approved by the United States, and the General Election.

After a very complicated 2017, this year will have a high volatility as many processes will be concluded, according to Adrián Muñiz, economic analyst at Vector CB.

“We will know the result of the different processes, which will also bring about challenges for the Mexican economy.”

NAFTA talks

According to the experts, NAFTA talks are among the events which represent the highest degree of uncertainty for this year.

The risk of the agreement termination is still present, and while its real impact on our economy will be reflected until 2019, it may have immediate consequences in financial markets, specifically in exchange rates, and in other economic variables, such as inflation, according to James Salazar, economic analyst at CI Banco.

A possible NAFTA termination might mean a structural change in the trade relationship between Mexico and the United States; a clash Mexican economy will eventually adjust to, yet the transition could be expensive, pursuant to the experts.

U.S. Tax reform

The tax reform approved by the United States may have a considerable impact on the flow of direct foreign investment (DFI) in Mexico.

Mexican economy will also have to shift towards a new balance, where some of the new investments planned for Mexico with American capital will probably won't be concluded, and this could also be reflected on exchange rates, said Muñiz.

However, tax rates are just an element of many taken into consideration by investors, stated Salazar, who added that even in the United States no corporation pays 35% – the previous current rate – and with deductions, many paid between 20% and 25%, which is similar to the newly approved rate.

Interest rate increase

Both experts were more concerned about the increase in interest rate in the United States, which according to Muñiz, will force the Bank of Mexico to enter into an upward spiral of interest rates.

If the Federal Reserve of the United States starts to increase rates at an accelerated pace, the Bank of Mexico (BANXICO) will probably have to do the same, and should Mexican authorities increase it to levels higher than 8% or 8.50%, it could have a significant impact on consumption and investment, pursuant to Salazar

“We have to find a way to separate Mexico's monetary policy from the American policy, because we already have high levels and we don't have a margin to keep increasing rates; besides the interest rates increase, it's an incentive so there can be a flow of capital towards the U.S. and this will also affect exchange rates,” explained Adrían Muñiz.

General Election

Without a doubt, the winner of the General Election will also have an impact on our economy, as they could reform the economic policies of Mexico and revoke some of the initiatives launched.

This will not only generate uncertainty but also, it may impact investment, mainly in infrastructure, construction, and economic growth, according to Salazar.

“The risk here is that the positions of the three main presidential candidates are polarized, particularly those of the one who has a marked advantage, according to the polls (Andrés Manuel López Obrador), who is proposing a radical change to many things,” said Aníbal Gutiérrez, professor and researcher at the Faculty of Economics of the National Autonomous University of Mexico (UNAM).

The current administration will try to stabilize the situation yet there are several factors playing against it. Especially at a local level, where crime unleashes because there is a change in administration, agreements, and more, said the professor.

“I think 218 will bring us a lot of instability. Whether this will lead us to a crisis is unclear, but there's going to be volatility that our economic institutions will try to handle. I think 2018 will be complicated regarding economy, security, and politics,” said Gutiérrez.



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