Mexico’s economy: may you live in interesting times.
US Treasury Secretary Janet Yellen (L) sits next to Mexico’s Finance Secretary Rogelio Ramírez de la O (R). Photo credit: Fernando Llano.
The dollar strengthened against global currencies after President Biden’s decision not to run again on Sunday. It fell against the peso, though. This silver lining among Mexico’s economic clouds since the June election didn’t last long. By Wednesday morning, the peso was the second worst performing currency in the region off the back of a shock inflation report.
“May you live in interesting times” is an apocryphal Chinese curse. Increasingly, it applies to President-elect Claudia Sheinbaum regarding Mexico's economy.
Post-Covid, the country enjoyed some benign years. But markets threw a tantrum after failing to price in Sheinbaum’s supermajority. Mexican equities fell ten percent in a day. This was their worst day since 2008. The peso was similarly hammered.
This short-term volatility overshadows greater long-term problems. Mexican economic performance is expected to weaken this year as persistent inflation and rising labour costs hinder growth. President López-Obrador (AMLO) ends his six year term with the weakest period of growth since 1988.
Emerging markets are having a tough time in 2024. A strong US dollar generally harms emerging economies. This is because foreign investment and capital vanish when the dollar gains. A stronger greenback makes debts held in dollars harder to pay. As a result, the IMF forecasts a modest slowdown across all emerging market economies.
For now, the IMF sees Mexico lagging other emerging markets because of high interest rates. This week's report dashed hopes rates would fall. And Mexico’s fortunes are strongly tied to the softening US economy.
Higher tariffs and non-tariff barriers on goods from China present Mexico with an opportunity. It's a singular chance to capitalise on the nearshoring of US supply chains. Mexico hasn’t yet. That doesn’t mean it can't. Mexico's exports to the US reached $455 billion in 2022. That's a 64% increase in ten years. Mexico’s imports from China went from 1% in 1994 to 20% in 2022.
Chinese manufacturing wages have topped Mexico's. Coupled with geography and lower political risk, Mexico’s external competitiveness has increased. Mexico's position in the global pay league table hasn't, though. Despite this, Mexico has seen a significant increase in its minimum wage. Mexico's relatively fast wage growth, versus its lagging economy, threatens its ability to capitalize on its favourable position.
Beyond that, there are enormous longer-term challenges. Crime deters investment, whatever the broader geopolitics. According to the World Economic Forum (WEF), among 140 countries, Mexico ranks 134th in police reliability. It ranks 134th in organized crime saturation. In Transparency International's corruption index, Mexico ranks 126 out of 180 countries.
Finally, Mexico ranks poorly in institutional strength. This is what startled markets when Ms Sheinbaum secured a supermajority. Strong institutions are critical to tackling corruption, crime, and securing investment. WEF’s 2020 institutional soundness index ranked Mexico 123rd place out of 141 countries.
AMLO is pushing a raft of constitutional reforms in the final weeks of his presidency. These are set for lightning speed committee approval next month. They'll have significant implications for Mexico’s institutions, its judiciary in particular. Investors will be watching what happens. Whoever wins the White House in November will also be watching. USMCA is up for renewal in 2026. Donald Trump and Kamala Harris will each find elements to dislike in AMLO’s reforms. This legislative coup might feel like a victory party for AMLO’s Morena diehards in August. Mexico, and Sheinbaum’s government, could wake up with a nasty hangover next year.