Mex-Economy in Distress, Not Shambles

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One thing is clear: Mexico is not even close to facing an economic collapse during the final year left to the administration of President Enrique Peña Nieto. Red lights, however, are blaring all over the place. Here’s an overview as to what we should be watching for regarding the shape of things to come in the near future.

The worst red light flashing is that of inflation. It will come as no surprise that, when December is over, Mexico will boast a whopping 7 percent inflation rate for 2017, and that figure is expected to keep on rising.

The reasons for the surge are obvious, and President Peña Nieto is responsible. Last January, he was warned by sound advisers that hiking up taxes on gasoline and diesel would have an inflationary effect. He paid no heed, and this led to a jump from an economy that enjoyed a stable 3 percent inflation just a year ago, up to  percent this year.

In economics 101, they teach you that all taxes are inflationary. Obviously, Peña Nieto never attended an economics 101 class, and going into 2018 with a dangerously growing inflation is definitely not good news. But Peña Nieto got the tax money he needed to survive through 2017.

Of course, the official cadre of finance journalists consistently forecast that “inflation will come down,” but the fact  is, it has not happened and may not happen, even if the new Bank of Mexico (Banxico)central bank director, Alejandro Diaz de León, hikes interest rates, already at 7 percent.

And while we are on the subject of Banxico, let’s not forget that when President Enrique Peña Nieto came to power on Dec. 1, 2012, he received from former President Felipe Calderón $199 billion in international reserves. Nowadays, Banxico is down to just $172 billion. If my arithmetic doesn’t fail me, 199 minus 172 shows us that Peña Nieto, along with Agustin Carstens as Banxico director, lost $27 hard-earned-and-saved billion under the claim that they were being used to “control” the peso-dollar exchange rate. Like the old song says: Where have all the flowers gone?

And by the way, Carstens left Banxico last week to assume a new job. Again, the official finance press hailed him, but every sailor knows that rats are the first to abandon ship at the first sign of danger.

A second problem in Mexico is the economy itself. The gross domestic product rate for 2017 is still uncertain, but up until the last quarter of this year, the economy had grown a dismal 0.75 percent. If the year closes with a meager circa 1 percent growth – the lowest in the past 25 years – Peña Nieto will definitely have nothing to brag about, other than to point out that it is still economic growth, albeit very little growth.

A third issue to follow is the ongoing North American Free Trade Agreement (NAFTA) negotiations, which up until now are not even close to reaching any conclusion, positive or negative.

Definitely, the Mexican agenda established by top negotiators and Mexico Economy Secretary Ildefonso Guajardo is not going well. According to the original Mexican course of action, the negotiations should be complete by now, but that hasn’t happened. In fact, the rounds of talks are being programmed deep into next year, with U.S. President Donald Trump’s Sword of Damocles always hanging over it.

Even more, an increasingly aggressive group of economists are demanding that these negotiations be abandoned and let the next president-elect in the July 1, 2018 elections  do the renegotiating with all the ground that’s been advanced on so far.

Of course, that’s not going to happen, as President Peña Nieto will not drop out of the negotiations, even if his time is almost up.

But the uncertainty as to where it’ll go is already hurting the economy by shooing away investors willing to wait and see what the final outcome of NAFTA will be. The investors are right to do so. But, definitely, direct foreign investment rates will keep shrinking for as long as the future of the once-booming NAFTA economy is still being renegotiated.

In the end, the big question is not with Canada and the United States, but with Mexico. Peña Nieto wants to sign the NAFTA-2 accords before he leaves of office. But again, economists who do not trust him foresee that he’s going to leave a Trojan horse behind in the Mexican economy, whatever that may be or mean.

The Mexican economy will definitely go on, and there will be life after Peña Nieto. But the president and the rest of us who survive in this economic environment will have to sail perhaps without breeze into the next administration a year from now.




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