As the global financial community is braced to withstand the impact of looming US interest rate rises, Mexican officials are confident that this will be a net positive for them, as the country’s economic growth is expected to reach 5% in the medium term, in spite of its current modest performance.
“We are an emerging market, but we are probably better prepared than most emerging markets to face that,” said the Mexican secretary of finance, Luis Videgaray, in an exclusive interview with Emerging Markets.
Mexican policymakers believe they are now well positioned to benefit from the US recovery while mitigating the impact of the forthcoming Fed move.
“The fundamental driver of that decision when it happens is a positive one for Mexico. I will always take US growth as a positive thing, even if it comes with a rate hike,” Videgaray said.
Mexico had a commitment to preserve its strong fundamentals, he argued. Those include a sound monetary policy, fiscal responsibility, and a well capitalised and well regulated banking system.
“Our banks are better capitalised than those in Europe or the US,” the secretary said. “Our current account deficit is low compared to other countries - it is less than 2% of GDP. We have liquidity buffers, we have a substantial amount of foreign exchange reserves.”
Mexico still has a flexible credit line agreement with the IMF. “Our currency is quite liquid and flows freely. It is also a buffer to face volatility, so that any shocks are not translating into the real economy,” Videgaray said.
“We have set a combination between policy tools and strong fundamentals that will allow us to better face increase volatility, which will be felt.”
Vidagaray is adamant that such global volatility will not take its toll on economic growth. The economy was set to gain momentum, he said, thanks to the current structural reform process. Mexico’s GDP expanded by a mere 1.4% last year, he said, but that should almost double to 2.7% this year, he said, against the background of sluggish growth in Latin America of around 1%, according to international multilateral institutions’ forecasts.
Instead of limping along with the rest of the region and performing in line with its relatively low growth average of 2.5% during the past 25 years, Mexico is now on a growth path to reach “close to 5% in the medium term,” Videgaray said.
Many private sector experts tend to believe that Mexico has now passed the right reforms to unlock its growth potential, and that such reforms in the oil and energy sectors are being implemented satisfactorily. “Mexico is showing the way forward. They are doing everything they should be doing. They should also benefit from tailwinds from the US,” said Ramon Aracena, Latin America chief economist at the Institute of International Finance.
“Sub-par growth is a structural problem in Mexico, not a cyclical issue,” said Videgaray. “This is where the structural reform agenda comes from... it’s all about growth. We are confident that these reforms, as they are implemented, will change our growth trajectory.”