Economics: Looking ahead to 2022 and beyond

MEXICO - Report 20 Dec 2021 by Mauricio Gonzalez and Francisco González

In the last issue for 2021, in place of our usual monthly review we are providing an overview of the most significant features of the economic outlook for 2022 as it currently stands
Despite the extent to which the Mexican economy rebounded in late 2020 and the first half of the current year, we estimate that GDP will expand only 5.8% in 2021 and recover to pre pandemic levels in the second half of 2022. While GDP growth next year will surpass its historical norm (3.4% e vs 2.5%), on the strength of a certain rebound in consumption and investment, the Mexican economy will revert to a mediocre growth range of 2.0%-2.5% starting in 2023.

Public finance in Mexico has been eroding during the last years and specifically since the first days of the administration of President Andrés Manuel López Obrador as revenue growth has lagged the expansion of government spending due to both structural increases in transfers and subsidies and investment in public works, and mounting pension and retirement liabilities, thereby expanding the fiscal deficit as measured in Public Sector Borrowing Requirements from a historical average of 2.5% to the 4.2% level estimated by the finance ministry for 2021. Moreover, debt servicing costs are poised to rise considerably in response to the global upswing in interest rates just getting underway and the burden of additional government liabilities that will have to be assumed.

This implies public debt costs will rise from 2.7% of GDP in 2021 to 3.4% in 2024 with no fiscal reform anywhere in sight to address expanding revenue shortfalls. The combination of weak revenue and increased public sector spending will preclude, among other factors, stabilizing fiscal debt at 51% of GDP as of 2022, as the authorities are projecting, with that indicator now on track to climb to a 2022 year-end close above 53% of GDP and close to 58% by 2024.

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