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Economic change: Mexico is missing the main target

The informal economy in effect blocks growth, so why is no one proposing tax and social security reform to bring workers and companies into the formal sector?


The Mexican economy has been remarkably a consistent performer since the 1994 tequila crisis. 

Annual GDP growth has averaged 2.48% and, while there have been some peaks and troughs, economic performance has been remarkably consistent regardless of who has formed the government. It hasn’t mattered whether they are relatively left or right-leaning, whether they have majorities or minorities in congress, are reformist or managerial, or whether they have been boosted or battered by international events.

The outgoing government is an interesting example: the reforms introduced at the beginning of Enrique Pena Nieto’s administration got everybody very excited. Who remembers economists in 2014 excitedly forecasting long-term sustainable GDP growth of above 5% following structural reforms of Mexico’s telecommunications, energy and financial industries?

Maybe that is why markets have shrugged off Andrés Manuel López Obrador (Amlo)’s victory in the presidential elections. Does it even matter who is in power?

A GDP growth rate of 2.5% is clearly below potential for this low-cost economy. 

As Nuno Matos, chief executive of the rapidly-growing HSBC Mexico, points out, the low credit penetration gives an amazing opportunity. If the credit-to-GDP ratio grew to 60% (not high even by emerging markets standards), it would imply 10% compound annual credit growth for 37 years – a great potential run for the banks and the economy.

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