four economic risks to drink with a political cocktail

What will 2023 be like? Everything indicates that worse than last year. There will be less growth and a risk of recession in a third of the world’s countries, including Mexico. Inflation will not be as high as in 2022, but that does not mean that prices will go down, they will just go up less.

Four economic risks

High interest rates. In the coming year, the economy will try to move forward with the handbrake on. The reference rate of the Bank of Mexico is at 10.5% and will rise a little more. A year ago, it was at 5.5 percent. Banxico implemented an aggressive policy of increases to face inflation, but also to keep up with the Federal Reserve (which went from zero to 4.5%) and protect the value of the Mexican peso against the dollar. Rates will remain high and will complicate investment projects; it will make consumer credit and debt service for the federal government and local governments more expensive. In 2022, the increases were more successful in defending the peso than in fighting inflation. Will this continue to be the case in 2023? What impact will it have on GDP growth and the balance of public accounts? Waters with local governments.

Recession in the United States. One of the factors that will determine the performance of the Mexican economy in 2023 will be what happens with our neighbor and main trading partner. The probability that the US economy will enter a recession in 2023 is 70%, according to a Bloomberg survey of 38 experts in December. Just for reference, in April of last year this probability was 30 percent. The most likely time for the recession to happen is the second quarter and experts are confident that it will be mild, with a drop in GDP of no more than 1% between April and June. We are talking about scenarios and probabilities. It is not certain that the United States will enter a recession, but there is also no guarantee that it will be short and shallow. For now, the United States has a flu picture and Mexico could have something more than a “cold.” 40% of our economy depends on the United States. They are exports, direct investment, remittances, tourism… confidence.

T-MEC. The trade agreement is the most valuable asset of the Mexican economy, along with its geographic location. We have Location, Location, Location. In 2023, the T-MEC will also be the “territory” in which some issues that are crucial on the agenda of President López Obrador and also relevant for businessmen and the Government of the United States and Canada will be resolved. We will not know if there will be wrestling, but we have a billboard. There are several issues, but none as relevant as the controversy raised by the United States and Canada against Mexico for some energy policy decisions by the Mexican government. In January we will know if these differences were resolved in the consultation phase or if they will go to the panels. For Mexico, the risk has several faces. There is a lot of talk about trade sanctions that could be worth billions of dollars, perhaps more relevant is the cost of maintaining substantive differences on the future of the energy sector and the fight against climate change. There are billions of dollars of investment that could come to Mexico or go elsewhere. They are awaiting the outcome of this controversy and observing each of the signals that are emitted from the National Palace.

PEMEX. The largest company in Mexico was one of the beneficiaries of Russia’s attack on Ukraine. In 2022, international oil prices rose and this translated into additional income for the parastatal. The Mexican mix had an average price of 89.45 dollars in 2022. It was 38% higher than the 64.8 dollars in 2021. This difference was pure oxygen for a company that owes 105,000 million dollars and served to put a pause on sensitive issues of the oil company as the evaluation of its low efficiency, for example in production and refining. The rating of the debt of the Mexican oil company was also not a topic of conversation because the high price of oil served as anesthesia. What are the chances of repeating the wonderful year for PEMEX? 2023 starts with a 5.55% drop in the price of the Mexican mix, which is now at 65.8 dollars. If that price level is maintained, the accounts of the Mexican giant will not be so happy. There are 361 days left and there is a risk that this company will become a factor of uncertainty for public finances. Because of its high debt and its inefficiency. Mexico’s economy has been de-oiled, but AMLO has increased the government’s commitment to PEMEX. This is due in their six-year goals. Pay attention to the impact on public finances. Politics. This year there will be relays at three key institutions. It was already that of the Supreme Court of Justice, but the National Electoral Institute and UNAM remain. In half a year we will have elections in Edomex and Coahuila. At the end of 2023, it will be the discovery of the Morena candidate, what can go wrong with this cocktail of complicated political issues in a polarized country?

lmgonzalez@eleconomista.com.mx