15 | DIC | 2019
U.S. downturn and public spending: Mexico’s main challenges for 2019
An internal risk factor for Mexico’s economic growth is the possibility of a slow execution of public expense during the first few months of 2019 - Photo: Brendan Smialowski/AFP

U.S. downturn and public spending: Mexico’s main challenges for 2019

01/01/2019
17:53
Rubén Migueles
Mexico City
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U.S. economic growth is expected to go from 3% in 2018, to a rate of 2.3% this year, experts say

In the international arena, one the major risks facing Mexico’s economic growth in 2019 is a lesser global dynamism, notably the United States’ productive apparatus, according to experts.

As for internal factors, academics and financial analysts from the private sector worry about a slow execution of public expense during the first months of Mexico’s new administration

The reason why external drivers may show a lesser dynamism is that the U.S. economy will likely expand at a slower pace than in 2018. According to the Federal Reserve’s most recent projections, U.S. economic growth is expected to go from 3% in 2018, to a rate of 2.3% this year, which will surely have an impact in Mexican economy since 80% of national exports go to said market, commented Alejandro Saldaña, Economic Analysis manager at the Ve por Más financial conglomerate.

Amidst threats of a trade war and protectionist measures announced by president Donald Trump, the possibility of a deceleration or even a recession in the U.S. is more and more feasible, which would have a major financial impact on Mexican manufacturers that are closely related to the former’s economic cycle, according to James Salazar, an economic analyst at CI Banco.

Furthermore, another internal risk factor for Mexico’s economic growth is the possibility of a slow execution of public expense during the change in administration.

“We have observed this factor before during changes in the government system. It usually happens during the first months of the year following the elections as a consequence of the dismissal of government officials, which entails a loss of human capital that accentuates said slow execution in expenses at the beginning of the six-year term,” Saldaña pointed out.

In this context, uncertainty surrounding the new administration, a new formation of congress, and the promotion of initiatives that have raised questions among the Mexican people are added to the internal risk factors that could ultimately cause private investment to stagnate.

In the political domain, the way in which legislators of the new left-wing ruling party Morena (National Regeneration Movement) decide to accompany the decisions of the Executive branch, and whether or not they decide to launch initiatives that might jeopardize both financial and physical investment remains to be seen, commented Aníbal Gutiérrez, a professor and investigator at UNAM’s Faculty of Economy.

Meanwhile, investment performance in Mexico has remained stagnant over the past two years, with a fragile dynamism, added the expert.

Some factors such as the renegotiation of the North America Free Trade Agreement (NAFTA), the change in government, and growing uncertainty in face of some initiatives launched by the new administration could considerably limit investment in the following months, which would translate into a slower economic growth rate.

In addition, interest rates have shown an increase. The Bank of Mexico recently announced an increase in its benchmark interest rate by 25 basis points and, while this represents a higher cost of financing, it could also affect investment in the country and cause consumer credit to grow more expensive, all of which would limit economic growth in 2019.

Furthermore, there is a risk that democrat legislators in the United States might scrap the new U.S., Mexico, Canada Agreement (USMCA) as further requests from the U.S. government are put on the table, though there is a low probability that this will happen, said Salazar.

As for public finance, the stretch in the benchmark interest rate sets a limit for the new Mexican government’s maneuverability in case the country’s income does not level with public spending.
 

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