Mexico’s economy is presumably in for an unpleasant year in 2022, as the lift it gets from U.S. development is exceeded by blows from tight fiscal and monetary policies and vulnerability over the government’s agenda. Bank of America Corp. cut its development conjecture from 2.5% to 1.5%, analysts drove by boss Mexico and Canada financial expert Carlos Capistran wrote in a note Tuesday. Talking in a video conference subsequently, he said Mexico’s creation numbers currently reasonable won’t arrive at pre-pandemic levels until the following year.
Latin America’s second-biggest economy shrank in the third quarter of 2021, and a poor start to the October-December close to the year suggest the contraction wasn’t entirely due to one-time factors like the peak of Covid-19’s Delta variant, Capistran wrote. The bank also cut its growth estimate for 2021 from 5.8% to 5.2%.
“Mexico is potentially in a low growth regime,” Capistran wrote. Weak activity data show “the rebound from the initial phase of the pandemic is over and that activity in Mexico is, if anything, moving down again.”
The country has been propelled throughout the pandemic by hefty demand from the U.S., which helped businesses to quickly reopen and expand in the manufacturing heartland on the northern border.
External funding has also been drying up, with investor appetite undercut by the president’s “state-centric agenda,” Olga Yangol of Credit Agricole CIB wrote in a note Tuesday. “Lopez Obrador has shown a tendency to centralize decision-making, which has led to institutional erosion and inefficient government functioning.”
However, Mexico now “seems to be decoupling from U.S. growth,” Capistran wrote. He argues the trend may be explained by the contrast between heavy spending and loose monetary policy in the U.S. versus President Andres Manuel Lopez Obrador’s austerity and the Bank of Mexico’s perennial hawkishness.
He has further spooked investors with statist legislation like an electricity reform bill that seeks to boost the state utility’s market share. “The president is, as he has declared, doing Mexico’s 4th transformation, and all transformation processes imply change and hence uncertainty,” Capistran wrote. “High uncertainty has likely being one of the reasons why investment is very low.”
One of Mexico’s best opportunities for growth this year is “near-shoring” — a push to persuade companies that are moving away from China or want simpler supply chains to base facilities in Mexico, both analysts said. Neither was particularly bullish, however. Yangol noted “the government’s state-centric policy risks undermining the opportunity,” while Capistran wrote it’s unlikely to change this year’s growth “in a significant manner.”
The low growth and decoupling from the U.S. are likely to weigh on the peso, which could weaken from the current 20.4 to the dollar to 22 by the end of the year, Capistran said in the video conference.
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