August 27, 2021

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Main Risks for the Mexican economy in the short and medium term – Grupo En Concreto

Main Risks for the Mexican economy in the short and medium term – Grupo En Concreto
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Mexico’s GDP confirms strong rebound in the second quarter of the year

According to information from the National Institute of Statistics and Geography (INEGI), the Gross Domestic Product (GDP) of Mexico during the second quarter of the year (2Q21) registered a growth of 1.5% at a quarterly rate (19.5% annually), with an uneven behavior among its components, said CI Banco analysts.

In their informative note, they point out that in the accumulated in the first quarter of the year, the economic rebound is 7.4% and that the economic recovery gained strength in the second third of the year worldwide and Mexico was no exception.

They add that Mexico’s GDP confirms a strong rebound in the second quarter of the year, but with doubts and risks to maintain the pace of economic recovery in the second half of the year, such as the following:

  • Monetary stimulus in the US – There is a high probability that the Fed will announce a reduction in monetary stimulus, in particular its monthly bond purchase program, before the end of the year (start tapering). Although it is not expected in the short term that they will think of raising interest rates, the possibility that inflationary pressures will intensify and cause a change in the discourse of the FED, with a tightening of its monetary policy earlier than expected, cannot be ruled out.
  • Slowdown in the global economic recovery.- The delta variant of the coronavirus has put economies around the world on alert, slowing a return to normal when it seemed that vaccines had managed to partially dominate the virus. The recent economic figures on industrial production, retail sales and consumer confidence, both in China and the US, were below expectations and could predict reductions in GDP growth forecasts for this 2021.
  • Geopolitical tensions – The Taliban seized Afghanistan, a dramatic event that marks the apparent end of a 20-year American era in the country. US President Joe Biden defended his decision to withdraw troops from Afghanistan, although he admitted that the Taliban takeover happened faster than expected. By itself, it is not an event that affects financial markets in the short term, but in the medium and long term it can undoubtedly have very negative effects on international relations. The situation can get complicated and new interventions in Afghan territory are not ruled out.
  • Inflation in Mexico.- The latest annual inflation data is 5.81%, with figures as of July. Thus, although annual headline inflation has been falling for 3 months from 6.08% in April; core inflation continues to rise and has been above 4% for 5 months (4.66% in July). Although we continue to consider that it is a transitory issue, inflation will not drop significantly in the remainder of the year, with which they expect an action from Banxico (increases in its funding interest rate).
  • Legislative changes in Mexico.- The administration of President López Obrador continues trying to make changes to the Electricity Industry Law, the Hydrocarbons Law and will seek an electoral reform to the INE. In addition, there is the possibility that controversial initiatives will continue to be presented, especially by the Legislative branch such as the management of Afores resources, international reserves (with the inclusion of the issue of the use of Special Drawing Rights granted by the IMF) and the still under discussion proposal to reform the Bank of Mexico Law.
  • Moratorium on loans granted by commercial banks due to the slow recovery of employment (and those recovered are with lower wages) and the closure of companies (especially SMEs).
  • Debt Rating.- Recently, the rating agencies have kept the rating of Mexico’s sovereign debt unchanged, but the risk of downgrade remains latent as it remains in a negative perspective, especially due to the pressure that PEMEX can generate on the public finances of the country.