Economics: Risk outlook for 2019
The sharp setbacks experienced by Mexican financial markets and the peso during October and November on often troubling signals emanating from the incoming administration and its congressional majority, as well as the broader international market gyrations of the late autumn, eventually gave way to corrective measures. Following Banco de México’s December rate hike, and the López Obrador government's delivering an investor-satisfying budget based on realistic economic assumptions and prudent spending proposals in keeping with AMLO’s election campaign commitments to keep public finance in order, the peso and other financial assets have enjoyed a notable recovery that has helped to deactivate macroeconomic risks over the near term.
Nevertheless, conditions of medium-term economic uncertainty persist on both the international and domestic fronts. Among the main external risk factors the Mexican economy is facing as we move further into 2019 is the prospect of slowing economic growth in the United States as well as in other major economies globally. Furthermore, heightened uncertainty as to the future of trade will continue to exert pressure. In the specific case of Mexico there is the uncertainty surrounding the upcoming US congressional debate on USMCA/T-MEC ratification and other sources of exchange rate depreciation risk, as higher import costs could further fan inflation locally.
No matter how the proposed new trade pact plays out, both domestic and foreign investors are likely to be more skittish on Mexico. Already weak levels of private investment are likely to be further depressed by rising interest rates, in addition to skepticism regarding legal protections in Mexico in light of both the Texcoco airport cancellation and the government’s inability to date to spell out what role private investors will be allowed to play in key energy sectors. Meanwhile, oil exports are expected to contribute less to GDP as crude prices continue to slump and new officials struggle to develop the capacities necessary to efficiently implement budgets and complicated infrastructure projects such as those the government has planned for refineries and railroads, a learning curve that could also lead to a shortfall in public investment.
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