Economics: Risk sources expand as the year ends
In this, our last issue for a year in which Mexico’s economy will experience its greatest contraction in 90 years, we take a quick look at the direction of the most recent economic indicators, assess sources of heightened risk moving forward, and offer our outlook for the coming year. There have been some positive developments, especially on the export front, but generally the outlook is less promising.
Unfortunately, the government is as devoid as ever of any strategy for accelerating economic growth while risk sources are tending to mount. Public finance continues to deteriorate, with recession-imposed revenue shortfalls combining with the government’s stubborn insistence on accelerating spending on social programs and infrastructure projects of dubious worth. It has begun to gradually relax fiscal discipline, a shift it is likely to sustain going forward.
Pemex remains the weakest link in public accounts. The company continues to accumulate massive losses and is strapped for cash. With the government still slow to do anything to seriously assist the NOC, it will continue to act as a dead weight on public finance and a threat to the country’s sovereign investment grade.
Furthermore, although the private banking system as a whole is well capitalized and maintains more than enough reserves to cover non-performing loan portfolios, there are already nine out of 50 commercial banks whose capitalization levels are below average, with their non performing portfolios also greater than the system average. Such banks are likely to need further capitalization soon; failure to do so could pose the risk of runs by depositors at institutions in this at-risk group, which includes not only small and medium-sized banks but also some of the large ones. Meanwhile, the Morena Senate continues to try and toy with banking regulations, with little regard for the real-world implications of such measures.
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