Economics: Economic challenges for the new administration

MEXICO - Report 16 Jul 2018 by Mauricio González and Esteban Manteca

International conditions could affect the viability of the economic program that Andrés Manuel López Obrador’s government hopes to begin implementing as soon as it takes office December 1, especially considering the extent to which the last two presidential administrations have indebted the country, as well as the trend toward rising interest rates in recent years, both of which will leave the incoming administration with comparatively scant maneuvering room on the level of fiscal policy.

That economic strategy proposes to combine macroeconomic stability and keep a firm lid on public debt while promising never to raise taxes and to prioritize public investment, which it intends to expand to 5% of GDP. At the same time, the government is committed to the very pressing need to eradicate extreme poverty and greatly reduce inequality through a broad array of initiatives for promoting productive employment, supporting small and medium-sized enterprises and rural producers, especially crop and livestock farmers, and significantly raising the minimum wage. They also call for sustaining national conditional cash transfer programs to poor households and others, and promoting post-secondary school access, youth job training and cash transfers for the elderly.

If they are to have any chance of making good on such pledges they must be fully cognizant of mounting international pressures, such as more restricted access to international credit, rising interest rates, trade wars and the likelihood of a slowing of global economic growth, precisely the opposite of the increasingly favorable liquidity, interest-rate and trade conditions that facilitated economic growth and government policy in Mexico for the better part of the past two decades.

With international interest rates projected to extend their rise in the coming years, Mexico will have to respond by pushing domestic interest rates higher than those of the US to continue to attract international capital inflows and help steady the exchange rate, even more so if the government of López Obrador fails to retain the confidence of institutional investors and keep Mexico's portfolio investment risk perceptions in check, thereby obliging the central bank to go further in jacking up interest rates.

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