Mexico

Mexico: headwind from oil vs tailwinds from the US

Mexico’s economic performance has been good with the EPI score projected to be 92.3%, or a B level, in 2016. After the drop in oil prices, Mexico’s primary export, the government faces the short-term challenge of boosting economic growth.

GDP growth has remained only slightly above 2% in 2015 and is projected to be 2.8% in 2016. At the same time, the recent improvements in the U.S. growth perspectives are positive for Mexico, as this would boost Mexico’s exports to its top trading partner. The 5-Minute Economist projects Mexico’s EPI score to improve gradually to about 94%, or a B+ level, by 2020.

The government’s fiscal outlook will be complicated by low oil prices, as around 10% of total government revenue comes from crude oil exports alone. The latest drop in oil prices has been taking a toll on the economy, as the peso lost a substantial share of its value and the budget deficit is likely to increase. The government will adjust fiscal policy in the light of weaker oil prices, but overall spending will remain high, causing budget deficit to stay close to 3.5% in 2016.

Mexico’s exports have been growing and it participates in most of the world’s largest free­trade agreements, with efforts to diversify away from the U.S., which still accounts for over three-quarters of all Mexican exports and half of its import. The upcoming trade expansion will be made through the Trans­Pacific Partnership and the Alianza del Pacífico.

Key reforms have been delayed, and the latest crisis of confidence related to corruption scandals and the investigation into the September 2014 Ayotzinapa student kidnappings has not only affected the government, but the political establishment as a whole, as all the main parties have been criticized for doing little to address rampant corruption and impunity.