(Bloomberg) — Mexico’s economy is likely in for a tough year in 2022 because of the boost it gets from U.S. growth, driven by tighter policies and uncertainty over the government’s agenda.
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Bank of America Corp cut its growth forecast to 1.5% from 2.5%, analysts led by chief Mexico and Canada economist Carlos Capistran wrote in a note Tuesday. Speaking in a video conference later, he said Mexico’s production numbers would no longer reach pre-pandemic levels until next year.
“Mexico is in a potentially low growth regime,” Capistran wrote. Weak activity data show “the rebound from the initial phase of the epidemic is over and activity in Mexico, if anything, is going down again.”
Latin America’s second-largest economy shrank in the third quarter of 2021, and a poor start to October-December suggests the contraction was not entirely due to one-time factors such as the peak of the delta version of COVID-19, Capistran said. wrote. The bank lowered its growth forecast for 2021 from 5.8% to 5.2%.
The country has been propelled during the pandemic by huge demand from the US, which helped businesses rapidly reopen and expand manufacturing sectors on the northern border.
However, Mexico is now “separating from American development,” Capistran wrote. He argues that this trend can be explained by the difference between heavy spending and loose monetary policy in the US versus the austerity of President Andrés Manuel López Obrador and the perennial dogma of the Bank of Mexico.
Read more: Mexico’s uneven US-driven recovery leaves many sectors behind
Olga Yangol of Credit Agricole CIB wrote in a note on Tuesday that external funding is also drying up as investor appetite has been dented by the president’s “state-focused agenda”. “López Obrador has shown a tendency to centralize decision-making, leading to institutional erosion and inefficient government functioning.”
He has stunned investors even more with statist legislation like the Electricity Reform Bill that seeks to boost the state utility’s market share. “The President, as he has announced, is making Mexico’s fourth transformation, and all transformation processes indicate change and therefore uncertainty,” Capistran wrote. “The high uncertainty could potentially be one reason for the investment being very low.”
Both analysts said one of Mexico’s best opportunities for growth this year is “near-shoring” — a push to persuade companies moving away from China or wanting simpler supply chains to base facilities in Mexico. However, neither was particularly fast. Yangol noted that “the government’s state-focused policy minimizes risk opportunity,” while Capistran wrote that this year’s growth is unlikely to change “in a significant way.”
Capistran said in the video conference that lower growth and withdrawal from the US is likely to put pressure on the peso, which may weaken from the current $20.4 to $22 by the end of the year.
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