Alphacast Highlight - Mexico December 2022 Macro Brief

2020 was the worst slump Mexico suffered since the Great Depression, with GDP dropping 8.5% YoY, and an incomplete recovery (4.8% YoY) in 2021. This follows a very weak decade for Mexican growth, with GDP expanding 1.2% on average in the ten years, but only 0% annually since 2018. The economy is still expected to perform weakly, with expectations in the 1-2% annual range for 2022 and 2023 - especially since Mexico's close economic ties to the United States means that any slowdown in the world's largest economy affects it greatly, a major difference from every other large Latin American country.

Activity

The Mexican economy retains an unimpressive performance. The Monthly GDP Estimate showed a slowdown in September, with annual growth of 5.2% YoY (versus 5.7% YoY in August) and 0.9% MoM (vs 1.5% MoM). Most major sectors continued growing, led by Primary Activities (8.6% YoY), Manufacturing (8.4% YoY), Retail (6.5% YoY) and Services (5.6% YoY), retaining the relatively robust rates from the previous month. However, both Mining and Construction showed negative results (-2% YoY and -3.8% YoY respectively), and more concerningly, deepened their relatively bad performance compared to August. Growth in 2022 can primarily be explained as a continuing recovery from 2020, and the unimpressive performance of the Mexican economy is expected to continue - output is foreseen to grow 2% in 2022 and a paltry 1.2% in 2023, an especially slow rate of growth after the 2020 slump.

The economy is expected to grow 2% in 2022 and 1.2% in 2023. In August, Mexico's monthly GDP estimate rose 5.7% YoY and 1.4% MoM, surpassing July's figure of 1.7% YoY and -0.7% MoM. Growth was led by Manufacturing Industries (+8.1% YoY), Services (+6.6% YoY), and Retail (+6.2% YoY). Growth in 2022 can be explained as a result of the still-ongoing recovery from the 2020 recession.

Inflation

Inflation appears to be easing. Headline inflation remained flat, at 8.7% YoY in September, the same as August's printing. Similarly, inflation expectations appeared to have eased in December (latest available data), falling from 8.4% in November to just 8.1%. Likewise, 2023 inflation expectations did not rise, remaining stable at 5.1% YoY in the same month. Combined, this signals a potential slowdown in inflation, which remains well above the 3% ±1% target range; price growth is expected to finalize at 8.1% in 2022 and at 5.1% in 2023.

Monetary Policy

Banxico has continued its aggressive rate hike policy in December, raising the policy rate to 10.5% in mid-December. This marks an unusually fast rise, since the same rate was just 4% in July 2021 - however, rates had not surpassed inflation until October 2022. Mexican inflation is at a multi-decade high, and international rates have risen to respond to the highest global price growth in nearly half a century, forcing Central Banks across the globe to tighten policy aggressively and rapidly - perhaps, risking a slowdown in 2023 and 2024.

FX & Markets

Continuing its pattern during the rest of the year, the Mexican exchange rate has remained relatively stable, fluctuating around the 20 MXN/USD range. However, this followed a particularly sharp devaluation in February 2020, with the exchange rate growting from 18.6 pesos to 25 in a few days - after which the currency gradually appreciated for two years.

Mexican equities appeared to have rallied in November and December, with the ETF peaking at levels 15% above the values reached in September and October by the end of November, and moderating somewhat in December. Equities had performed badly for most of 2022, due to a tepid economic performance in private consumption (the INEGI Monthly Index was just 3% above February 2020 in September) and real wages (real average income was just 1.2% above pre-pandemic levels in October). The Mexico ETF has surpassed its pre-pandemic levels for the first time since April 2021, and sits around 10% higher than in February 2020.

Fiscal

The Mexican government is expected to run a deficit of 3.7% of GDP in 2022 and 3.6% in 2023, following an expansion of expenditures and growth in revenue, explained to a certain extent by higher income in state-owned petroleum ventures. This comes after a small (in global perspective) deficit in 2020, running a negative balance of 2.9% of GDP in 2020 and 2021. Uncertainty surrounds the future of Mexican public finances, with future oil prices expected to drop further in 2023, higher financing costs due to global monetary tightening, and lack of clarity on future public policy all making fiscal projections hard to nail down.

Trade and Balance of Payments

The Mexican balance of trade has worsened since the beginning of the pandemic, with a trade deficit and a deficit in the current account. The trade deficit is largely explained due to export prices having grown half as much as imports since the beginning of the pandemic (+27.9% for purchases vs +13% for shipments), as well as a lower multilateral real exchange rate (-7.1% vs Feb-20). Consequently, the gap between Mexico's imports and exports has grown, especially due to lower petroleum revenues and bigger differences for all other goods.

This has affected Mexico's current account balance, which has remained negative since Q1-21, due to a secondary income surplus not offsetting negative results in goods, services, and (occasionally) primary income. In consequence, the balance of payments has worsened significantly, with the current account deficit being larger than the small financial account balances observed.