Raúl Anibal Feliz and Alejandro Werner Analyze Mexico's Macroeconomic Forecast for the Upcoming Presidential Term
On May 28, 2024, the Georgetown Americas Institute hosted a conversation with Raúl Feliz, professor at the Centro de Investigación y Docencia Económicas (CIDE), and Alejandro Werner, founding director of GAI, on the macroeconomic outlook for Mexico's next president. GAI Resident Fellow Nora Lustig of Tulane University moderated the conversation.
The frontrunners in the June 2024 presidential elections were Claudia Sheinbaum, who represented the continuity of President Andrés Manuel Lopez Obrador's populist policies, and Xóchitl Gálvez, who presented a possible return to what Raul Anibal Feliz termed "the neoliberal period." Regardless of the victor, the incoming administration would face several macroeconomic challenges.
Economic Growth and Employment
The Mexican economy has experienced slow growth for decades despite varying political strategies to spur it. The economy is expected to grow between 1.7% and 2% in the next two years, with inflation around 4.2% to 4.3%. However, Feliz pointed out that since 1998, the country's potential growth rate was at most 2%.
Mexico has faced a negative output gap of 3% and operated with about one million jobs less than full employment. Additionally, total factor productivity has yet to show significant growth. On a more positive note, the economy has shown substantial recovery in terms of output and employment following the COVID-19 pandemic. Feliz explained that with increased productivity, it will be possible to raise the country's growth rate or solve persistent issues like poverty, inequality, and a weak fiscal base.
Fiscal and Financial Policies
Feliz argued that the López Obrador administration's fiscal policy has been relatively prudent, maintaining public debt levels at less than 50% of GDP, despite the most recent pro-cyclical fiscal stimulus in 2024. Moreover, improved tax collection has allowed for higher spending on social programs without compromising fiscal solvency.
Werner agreed with Feliz, recommending that the Bank of Mexico focus on reducing interest rates. Werner also pointed to the need for gradual fiscal reform and highlighted the impact of security challenges on the economy. He proposed that an external evaluation of the Bank of Mexico's monetary policy framework could build confidence and increase the efficiency of the bank's operations and decision-making processes.
Immediate and Long-Term Economic Challenges
Mexico has experienced significant growth in the formal job market following the near-elimination of outsourcing in various sectors, meaning that Mexico's domestic production efforts have led to an estimated 7.4% wage increase, as the Mexican Social Security Institute recorded. The near-elimination of outsourcing in Mexico was a significant event that took place during the presidency of López Obrador. In 2021, his administration implemented labor reforms to prohibit most forms of outsourcing and subcontracting, aiming to improve labor conditions and ensure workers receive the benefits and protections they are entitled to under the law. These reforms required many companies to formalize their workers' employment status. Despite an estimated slowdown in recent months, Mexico has created an unusually large number of formal jobs, with many in the one- to two-times minimum wage range.
Werner mentioned that curbing crime could have a positive effect on the economy. In addition, the Mexican economy could benefit more from nearshoring, but this would only sometimes lead to convergence with advanced countries.
The Case of PEMEX
PEMEX, Mexico's state-owned oil company, has been burdened with substantial debt, which has become a significant issue due to its impact on the country's financial stability. Feliz suggested that restructuring PEMEX's debt could involve the federal government absorbing part of these liabilities. Since Sheinbaum won the June 2 presidential election and will take office on October 1, there could be a loosening of PEMEX's partnership plans with private capital. Fiscal reform is crucial to solving PEMEX's problems and strengthening public finances.
Werner warned that a PEMEX bankruptcy would be detrimental to the administration. To avoid generating more debt, he suggested an operational restructuring with private sector participation. He also highlighted the need to invest in electricity infrastructure to facilitate the energy transition to renewable sources.
Uncertainties for the Next Six Years
Audience members asked questions about the sustainability of public spending, the impact of a possible Donald Trump victory in the November 2024 U.S. presidential election, and how the Mexican presidential candidates would fulfill their commitments to expand spending. Werner and Feliz emphasized the need for tax reform to close the fiscal gap and maintain spending in crucial areas such as education and health care.
Regarding a potential Trump presidency, Feliz discussed tariff policy proposed by Trump, which would include a general 10% tariff and an additional tariff based on the U.S. trade deficit with certain countries. It is unclear whether this policy would apply to Mexico. If it does not apply, Mexico could benefit in the short term. However, if it does apply, export and foreign direct investment outlooks must be reconsidered. Despite this uncertainty, Feliz feels Mexico is well-suited to handle this situation.
Werner discussed the possibility of the United States adopting a more protectionist trade policy, limiting imports from China in an environment of near-full employment and seeking to curb migration. However, he noted that any trade policy should not affect Mexico too much. In the event that the United States imposes this proposed 10% tariff, he suggested that Mexico could, in turn, devalue its currency by 10% to 15% to maintain its export competitiveness. However, this would result in a decline in wages in dollar terms. In addition, if the U.S. increases tariffs on imports from China, Werner believes this could benefit Mexico. Finally, he predicted that there would be increased uncertainty and "noise" in the short term, especially if Trump was elected into office. This noise could be most prominent in trade, but eventually, there could be more effects on migration, drugs, and organized crime, where he expects to see much tougher actions that will likely impact Mexico.
Werner and Feliz agreed that fiscal reform is necessary to maintain the country's financial solvency. They also stressed the importance of maintaining and strengthening non-contributory pensions and eliminating tax exemptions and deductions to increase revenues.
In conclusion, regardless of the election's outcome, addressing issues such as slow economic growth, fiscal management, formal job creation, Pemex's debt restructuring, and potential external economic challenges will be paramount for Mexico's next president. The need for fiscal reform, prudent financial policies, and strategic investments in infrastructure and social programs emerged in the conversation as key strategies to navigate these challenges and promote Mexico's economic resilience and stability, all of which are crucial for sustainable economic growth and the alleviation of poverty and inequality.