Alphacast Highlight - Mexico March 2023 Macro Brief

2020 was the worst slump Mexico suffered since the Great Depression, with GDP dropping 8% YoY, and a split recovery between 2021 (4.7% YoY) and 2022 (3.1% YoY). This follows a very weak decade for Mexican growth, with GDP expanding 1.4% on average in the last ten years, but only 0.4% annually since 2018. The economy is still expected to perform weakly, with expectations in the 1-2% annual range for 2023 and 2024 - 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

2023 begins with improved outcomes. The Monthly GDP Estimate showed an increase in January 2023, with annual growth of 4.4% YoY (versus 2.6% YoY in December 2022) and 0.9% MoM (vs 0.1% MoM). Most sectors continued growing, led by Retail (8.2% YoY), Services (5.6% YoY), Manufacturing (4.8% YoY) and Construction (3% YoY). However, both Mining and Primary Sector showed negative results (-3.5% YoY and -1.1% YoY respectively), and, more worryingly, the favorable results achieved in December worsened. 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 a paltry 1.1% in 2023 and 1.8% in 2024, an especially slow rate of growth after the 2020 slump.

The economy is expected to go up 1.1% in 2023 and 1.8% in 2024. In December, Mexico's monthly GDP estimate rose 2.6% YoY and 0.1% MoM, below November's figure of 3.4% YoY and 0.4% MoM. Growth was led by Primary Sector (8% YoY), Construction (5.5% YoY), and Manufacturing (2.7% 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 fell to 6.9% YoY in March (versus 7.6% in February). Inflation expectations showed a smooth drop in March (latest available data), going from 5.3% in February to just 5.2%. Likewise, 2024 inflation expectations did not rise, remaining stable around 4% YoY. Combined, this signals a potential slowdown in inflation, which remains well above the 3% ±1% target range; price growth is expected to finalize at 5.2% in 2023 and at 4.1% in 2024.

Monetary Policy

Banxico has continued its aggressive rate hike policy, raising the policy rate to 11.3% at the beginning of March. 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

The Mexican exchange rate keeps appreciating at the beginning of the year, going from an average of 19.6 MXN/USD in December 2022 to 18.4 in March 2023. However, this followed a particularly sharp devaluation in February 2020, with the exchange rate growing 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 the first quarter of 2023, with the stock exchange in USD peaking at levels 32% above the values reached in September by the end of March. Equities had performed badly for most of 2022, due to a tepid economic performance in private consumption (real contractual wages were declining throughout 2022). Likewise, a consistent increase in risk country has been observed since October 2022.

Fiscal

The Mexican government is expected to run a deficit of 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 and 3.6% in 2022. 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. The trade deficit is largely explained due to export prices having grown less than import prices since the beginning of the pandemic (+27.5% for purchases vs +16% for shipments), as well as a lower multilateral real exchange rate (-8% 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 accumulated a deficit of USD 13.4 billion in 2022, 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.