The weak outturn is also an “irony” as the second largest Latin American economy seems to have done many of the textbook economic reforms, Augusto de la Torre told GlobalMarkets. He is not the only one: Mexico’s growth performance has continued to disappoint investors and puzzle analysts. The International Monetary Fund has forecast a drop from last year’s already modest 2.5% GDP growth to 2.1% in 2016, before a light rebound at 2.3% in 2017. “This is a central issue for the region as a whole,” de la Torre said.
Nevertheless, it is not the reforms themselves that need to be questioned, said Duncan Wood, president of the Mexico Institute at the Wilson Center. “All the reforms have been enacted. But they still require a lot of implementation. A lot of them will bear fruit in 10 or maybe 20 years. We may have to wait a long time until they play true,” he said.
“The reforms have yielded benefits,” added Jorge Familiar, the World Bank’s vice president for Latin America. “If you look at currency depreciation, which in the end is part of the solution because depreciation is a way of adjusting to external imbalances, it has not translated into inflation and the reason why is because some of the reforms have had benefits that lowered costs of service in an important way, like in telecommunications,” he said in an interview with GlobalMarkets.
Mexico’s underperformance is also explained by a combination of external and domestic factors which reflect in a weaker peso, according to Martin Castellano, senior Latin America economist at the Institute of International Finance.
“Part of the explanation is the currency acting as an automatic stabiliser amid global headwinds, including uncertainty surrounding the US elections. Weakening of the macro fundamentals, however, is also part of the story. The oil price decline has taken a toll on public finances,” Castellano told GlobalMarkets.
“While the government has met the fiscal consolidation targets thanks mainly to one-off revenue, it could not prevent an increase in the public spending-to-GDP ratio.”
In the meantime, the “Mexico mystery” should not be an excuse to question the validity of reforms, said de la Torre. “The advice that Mexico could give to other countries in the region is ‘do not expect the world economy to recover and commodity prices do go up again by miracle’.” No Mexican official was available to comment on the “mystery” issue.