Reforms are finally paying off for Mexico, its confident finance minister told Emerging Markets as he indicated that economic growth for Latin America’s second largest economy was on track to hit 5%.
Luis Videgaray, the secretary of finance, was adamant that the Mexican economy would benefit from the US economic recovery and would be rewarded for its efforts thanks to its enhanced competitiveness.
Growth has been sluggish in recent years. Mexico’s expanded by a mere 1.4% last year but it should almost double that figure to 2.7% this year against the background of anaemic growth in Latin America of around 1%, according to international financial institutions’ forecasts.
Vidagaray said it would gain further momentum thanks to the implementation of the reforms that have been approved swiftly in recent months.
Instead of limping along with the rest of the region and performing in line with its own 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.
Analysts are buying into that assessment. “In contrast to Brazil where weak investment has caused capacity constraints to build and look set to leave growth stuck at around 1.5% in 2015-16”, said David Rees, emerging market economist at Capital Economics, a consultancy; “we expect the Mexican economy to expand by about 4.0%.”
STRUCTURAL REFORM
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 now 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,” Videgaray said. “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.”
Mexico is also being rewarded by its strong macroeconomic and debt indicators, in spite of its still relatively high inflation — 4.2% in annual terms in September — and it does enjoy investor confidence. Gross fixed investment is picking up, with a 3.1% increase in July year-on-year, and has now grown during four consecutive months.
Videgaray argued that Mexico had a commitment to preserve its strong fundamentals. Those include a sound monetary policy, fiscal responsibility and well capitalised and well regulated banking system. “Our banks are better capitalised than those in Europe or the US. Our current account deficit is low compared to other countries.”