World Economy

Mexico Expects 2.5% Expansion

Mexico Expects 2.5% Expansion Mexico Expects 2.5% Expansion

The outlook for Mexico’s economy looks positive for 2016-2017. The  positive growth outlook is supported by various key factors such as rebounding economic conditions in the US on the back of strong employment, prolonged monetary stimulus, systemically sound banks and continuous low energy prices, according to Scotiabank.

“We estimate that the Mexican economy will expand by 2.5% in the year ahead”, added Scotiabank, Yahoo reported.

Since Mexico is an important oil exporter, it will continue to be susceptible to the structural changes impacting energy markets and oil price gyrations, notes Scotiabank. Structural reforms in energy sector have not been successful in avoiding a sharp decline in crude oil production till now. Private consumption remains strong and is expected to be an important driver of economic activity in 2016, says Scotiabank. Mexico’s construction sector will be susceptible to domestic credit flows to residential housing and public sector capital expenditures adjustments.

Meanwhile, price stability continues to be a support of macroeconomic strength. In December 2015, Mexico’s annualized inflation bottomed out at 2.1%. Slow down in domestic economy and structural reforms in the telecommunications sector contributed to lower cost pressures.

“However, the lagging effects from a weaker peso will prompt inflation to accelerate in the months ahead, but remain within the 3% +/- 1% tolerance range throughout the year”, noted Scotiabank.

The Bank of Mexico is not following the US Fed any longer. It had raised its interbank target rate in February by 50 basis points. The central bank is expected to further tighten its monetary policy,  added Scotiabank.

 Fiscal Problem

However, Mexico’s fiscal outlook continues to be a problem. The fall in crude oil prices revealed PEMEX’s structural deficiencies.  The authorities introduced a budget cut of 132 billion pesos as fiscal reform cut the reliance on oil-related revenue. The current account deficit of Mexico is expected to widen in the coming two years, putting pressure on the currency; however, the foreign capital inflows are likely to compensate the external gap over the period, said Scotiabank.

Since the start of the year, the US neighbor to the south has seen its peso sink to historical lows—prompting the hasty intervention of Mexico’s policymakers to smooth out the volatility.

The currency’s faltering fortunes have tracked other battered emerging market currencies hit by the global commodities downturn, yet the peso has still largely fared better than other EM currencies. The MSCI Mexico Index has outperformed the broader MSCI EM Index by 12% in local currency terms since October 2014, according to data from investment advisory firm DDCapital. That was at a time when the peso slumped nearly 30% against the dollar.