Mexican Malaise

By Hunter Bosson ’18

UntitledIn the nearly two years since Mexican president Enrique Peña Nieto assumed office and began one of Latin America’s most ambitious reform programs, Latin America’s second largest economy has achieved little more than tempered economic mediocrity. The country is still plagued by corruption, market volatility, and inefficient oil production, lending it paltry economic growth and widespread consumer pessimism. Perhaps most worryingly is that Mexico appears to be working at full capacity; unemployment is low, inflation steady, and this week Mexico’s central bank decided not to change its key interest rate.

Mexico’s economy is performing surprisingly badly given its economic conditions. Its currency has been heavily devalued against the U.S. dollar (its greatest trading partner) and its unemployment rate is a dangerously low 4.2%. Inflation is a mere 3% (although the prices of important staple foods have risen drastically in recent months). Yet what would seem idyllic to observers has left Mexico’s central bankers concerned; real interest rates will continue to be near zero. For a country with a history of hyperinflation, and consumers weary of price increases, such expansive monetary policy when unemployment is low is dangerous. Projected real GDP growth has been revised down to 2.8% after a disappointing start to 2015. Mexico’s economy has stagnated, and it appears to be the government’s fault.

Now that the Nieto administration’s early optimistic ambitions have been replaced by widespread malaise, it has become abundantly clear that what is holding the Mexican economy back is its ineffectual government. Corruption is still widespread, with 72% of Mexicans considering corruption a “very big problem,” and security threats in the wake of mass abductions of students leaves investment costly and risky. Even manufacturing exports, the core of most emerging economies, has slumped over the last year (with the exception of automobiles). Early promises to liberalize Mexico’s oil and telecommunications sectors have led to decreases in oil production and a mess of regulations. To compound the problem, imminent government austerity is set to squeeze the economy even further.

Reforms do take time, and oil booms are hard to start when crude is trading at less than $70 a barrel (even with a weak currency). But even if Mexico is simply stuck in a large pothole on the road to success, Nieto lacks the political capital to get out of the car and push, much less drive the country to prosperity. The future does not look bright for our southern neighbor.

 

Sources:

http://www.bloomberg.com/news/articles/2015-04-30/mexico-keeps-key-rate-at-record-low-3-as-economy-remains-weak

http://www.ft.com/intl/cms/s/0/17e43c26-d455-11e4-9bfe-00144feab7de.html#axzz3YuMTs1YU

http://www.forbes.com/sites/doliaestevez/2015/04/21/mexicos-two-biggest-challenges-corruption-and-the-rule-of-law/

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