Mexico: Large, Immediate Negative Impact and Weak Medium-Term Growth Prospects
resumption of strong and sustained economic growth. These obstacles are in the external, fiscal, and financial sectors. External Sector. Mexico remains (and will probably continue to remain) strongly linked to the U.S. economy. The country’s medium-term prospects thus depend heavily on the strength of the U.S. recovery. But given the significant loss of wealth suffered by an important segment of American consumers, and given the sizable U.S. external imbalances— which the national authorities will have to adjust sooner rather than later—the recovery of the U.S. economy is expected to be rather weak in the short and medium term (Blanchard 2009). This scenario is obviously unfavorable for Mexico’s economy since the U.S. market is by far the most important one for Mexican exports. In fact, since the passage of NAFTA, and despite having signed numerous free trade agreements with other countries and regions, Mexico has achieved little in terms of diversifying its export markets. This is partly because of its relatively poor infrastructure, but also because of its high logistical costs (e.g., transport, freight, and customs). Therefore, unless Mexico is able to gain access to other export markets, its medium-term growth prospects will be limited by the United States’ ability to fully recover its growth capacity. Even if this happens, the United States’ ability to pull the Mexican economy up could be diminished if the continuing large global trade and investment imbalances force a global realignment of exchange rates. Fiscal Policy. The dramatic reduction in the price of Mexican oil (from US$140 a barrel in 2008 to an average of US$60 in late 2009) has definitely taken a toll on the country’s public finances. Government expenditures, whose extraordinary increase in the early 2000s was fully financed with rising oil revenues, can no longer be sustained. This is because of the lower price of oil and the steady decline in Mexico’s oil production since 2004—which, in turn, is at least partly the result of the lack of sufficient investment in the sector. As a result, Mexico will inevitably need to go through a painful adjustment process that may take the form of either higher tax rates or lower government spending, or a combination of the two. It has become clear that current levels of government expenditures are incompatible with
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