A Primer on Mexico’s Unconventional Economic Success Story (Which You’re Unlikely to Hear Much About in the MSM)

Mexico’s economy was one of the best performers of 2022, despite (or perhaps because of) a whole raft of worker-friendly policies from the AMLO government.

Amid all the economic fallout from the ever-escalating conflict in Ukraine and the West’s disastrously backfiring sanctions, compounded by the supply chain woes lingering from the still-ongoing virus crisis, 2022 was a dismal year for many of the world’s economies. But some fared better than others. They include Mexico, which began the year in technical recession but finished it on a bit of a high.

Just over a week ago, the London-based Center for Economic and Business Research (CEBR) forecast that by the end of 2022 Mexico will have dethroned Spain, its former colonial ruler, as the world’s 15th largest economy. In so doing, it will become the biggest economy in the Spanish speaking world, a mantle it is likely to hold onto for some time to come. Granted, this is just a forecast but given the wafer-thin difference between their respective GDPs and the size of the gap between Mexico’s growth rate for the first three quarters of 2022 (3.3%) and Spain’s (1.5%), it’s probably a sound bet.

A week or so later, Mexico placed sixth on The Economist‘s list of best performing economies out of a selection of 34 OECD members. From Mexico News Daily:

The magazine ranked countries according to five economic and financial indicators – Gross Domestic Product (GDP) growth, inflation, inflation breadth (the share of inflation basket items whose price has risen more than 2% in a year), stock market performance and government debt – and assigned each an overall score. Mexico was beaten only by Greece, Portugal, Ireland, Israel and Spain.

Mexico’s strong performance was due largely to its 3.3% GDP growth between Q4 2021 and Q3 2022 – the fourth highest on the list. Although inflation was high – at 6.8% consumer price growth and 82.4% breadth – it still compared favorably to many other countries analyzed. Mexico’s average share price dropped by 0.9%, while its share of debt to GDP fell by 0.7%.

Readers may recall that The Economist is no great admirer of Mexico’s left-leaning President Andrés Manuel López Obrador (aka AMLO). As I reported in The Empire Strikes Back Against Mexican President AMLO (June 1, 2021), AMLO was given pride of place on the cover of the May 29-June 4 edition of the magazine. Above his picture was the headline “Mexico’s False Messiah.”

An editorial inside the magazine called on Mexican voters to “curb Mexico’s power-hungry president” whom it compared  with “authoritarian populists” such as Viktor Orbán of Hungary, Narendra Modi of India and Jair Bolsonaro of Brazil.

Contrast The Economist‘s depiction of AMLO with Time magazine’s near-messianic treatment of his predecessor Enrique Peña Neta, whose PRI government would end up being one of the most corrupt of modern times.

Mexican Peso: Strongest Currency of 2022

Only four largish economy currencies managed to hold their own against the US dollar in 2022. They are (in descending order): the Mexican peso (+5.37%), the Brazilian real (5.09%), the Peruvian sol (4.96%) and the Russian rouble (3.32%). While the pound sterling, the euro and the Colombian and Chilean pesos all registered historic lows against the greenback last year and even the Swiss Franc tumbled slighty, Mexico’s currency had its best year since 2012, when the currency appreciated 7.9% against the USD.

Much of the credit belongs to the Bank of Mexico, which, like Brazil’s central bank, preempted the US Federal Reserve’s aggressive hiking of interest rates by raising its own benchmark rate no less than 10 times between April 2021 and December 2022. It also helped that Banco de Mexico (Banxico for short) didn’t cut rates quite as aggressively as most of its peers during the chaos of 2020.

As I’ve noted in previous articles, Latin American countries are justifiably terrified of interest rate hikes from the Fed. When the Fed begins tightening monetary policy, it can often create a perfect storm in the region. Rises interest rates in the US raises the costs of the dollar-denominated debt of LatAm companies and governments. It can also trigger an outflow of foreign capital, which in turn heaps yet more pressure on the region’s currencies, making it even harder for both governments and companies to service their debt denominated in dollars or other foreign currencies. Rinse and repeat.

So far, Mexico has avoided this fate, helped along, of course, by higher dollar flows from exports, remittances, and foreign direct investment. In other words, an important reason for Mexico’s economy success story of 2022 is its increasingly close relationship with/dependence on the US economy, which performed significantly better than many of its advanced economy peers, particularly those in Europe. Unfortunately, that is unlikely to last…

Read the full article on Naked Capitalism