Despite a handful of internal and external risks, Mexico's economy shows resilience

Driven by an ongoing process of economic opening since the 1990s, Mexico has come to establish a solid macroeconomic base. Structural changes have allowed the country to improve trade flows and helped to soften the impact of a gradual slowdown in hydrocarbons production and exports. The rise of the country’s manufacturing base on the back of the North American Free Trade Agreement (NAFTA), instituted in 1994, enabled economic diversification and integration with the US and Canadian economies.

Equally important have been the profound economic reforms initiated after 2013, with a reshaping of strategic sectors such as energy and telecommunications. The energy reform alone is expected to bring in $180bn worth of new investment by 2030, as foreign companies expand their hydrocarbons exploration and development efforts.

Yet, despite the structural improvements of the past two decades, Mexico faces a combination of unprecedented risks that have been testing its resistance to an unfriendly economic environment. The election of Donald Trump as US president in late 2016 has led to an acute level of ambiguity in the Mexico-US relationship, with a complete overhaul of NAFTA risking a significant negative impact to Mexico’s economic partnership with its main trade partner. Furthermore, tax reform signed into law by the US president in December 2017 has added to the instability, due to its potential to divert foreign direct investment away from Mexico by persuading US companies to maintain or build factories at home. Internally, 2018 marked a year of general elections, which tend to bring an additional layer of uncertainty to most economies.

Throughout the second half of 2017 and the beginning of 2018, however, Mexico absorbed the underlying threats confidently, showcasing that despite the country’s exposure to potential risks, the economy continues to benefit from a high degree of regulatory maturity and sound macroeconomic management.

Adapting to Change

Mexico’s economic resilience originates from its capacity to adapt to a changing environment, the most recent example being the post-2014 era of lower oil prices. The gradual fall in domestic oil production and exports, caused by insufficient investment in the exploration and development of new discoveries, had a sustained impact on the country’s fiscal position. Oil exports, which amounted to roughly 40% of the state’s income in 2012, came to contribute just 17% of the national budget by 2017. However, the implementation of a tax reform programme that began in 2013 helped to counter the steep reduction in hydrocarbons earnings by raising tax collection revenue from 8% of GDP in 2012 to as much as 13% in 2017. Higher tax inflows will likely help to sustain growth at a stable level for the near future, as the economy continues to diversify.

Growth Metrics

In addition to testing the country’s response to change, challenging internal and external environments affected overall economic growth. Mexico’s GDP grew by 2.3% in 2017, down from a 2.7% expansion in 2016, according to the National Institute of Statistics and Geography ( Instituto Nacional de Estadística, Geografía e Informática, INEGI). Economic uncertainty increased after the start of the Trump administration: his “America first” ideals and strong rhetoric, which called into question the commercial and political relationship between the US and Mexico, began to affect investor confidence. This led to a steep depreciation of the peso, which fuelled high inflation over the course of 2017.

A look at quarterly growth shows performance varied over the course of the year, with the first three months of 2017 seeing a 0.6% economic expansion, which slowed to 0.2% growth in the second quarter. This was followed by a contraction of 0.2% in the third quarter, with two large earthquakes shaking the country in September. In the last quarter of 2017, however, GDP grew by 0.8%. This pick-up at the end of the year was encouraged by a stronger performance of the manufacturing sector in November and December.

In May 2018 Banco de México (Banxico), the central bank, said that it expected growth for the year to settle around 2.26%, potentially moving to some 2.34% in 2019. Other estimates are generally in line with the central bank’s predication. For instance, BBVA Research estimated in the first quarter of 2018 that full-year growth will be close to 2%. The IMF, for its part, forecast annual growth at 2.3% in its April 2018 edition of the World Economic Outlook, up from its November 2017 estimate of 1.9%.

Taming Inflation

After holding inflation to reasonable levels in recent years, high prices began to take a toll on the economy in early 2017. Averaging 2.7% and 2.8% in 2015 and 2016, respectively, inflation registered 13 straight monthly increases between July 2016 and August 2017, according to BBVA Research.

The upward trend was driven by a combination of two factors. Added volatility brought about by the result of the US presidential election accelerated the weakening of the peso, while Mexican consumers also had to contend with fuel price hikes that came with price liberalisation mandated under the energy reform. The increase in the cost of petrol had an extended inflationary effect by pushing overall transport prices upward. By the close of 2017 inflation had reached 6.77%, its highest point for the end of a year since 2000, according to INEGI. This is more than double the 3% annual inflation targeted by Banxico.

In response to the high inflation, Banxico raised interest rates by 0.25 percentage points in December 2017, and again by the same amount in both February and June 2018, bringing the rate to 7.75%, a nine-year high. Further interest rate changes will depend on how prices fluctuate in the second half of 2018. Inflation began to cool in the first quarter of 2018, retreating to 5% in March and then to 4.5% in May. Banxico expects inflation will fall to its target of 2-3% by year-end.

Reform Dynamic

Economic turbulence has been partially offset by the results of the structural reforms started by the outgoing president, Enrique Peña Nieto, which are expected to be continued in some capacity by the incoming administration of Andrés Manuel López Obrador of the National Regeneration Movement, who won the July 2018 election. Energy reform has brought fresh capital and technology to oil and gas exploration, leading to a host of new discoveries that are likely to improve domestic production over the coming years. Sector changes have also led to increased renewable energy generation and an opening of several sub-sectors of the industry to private competition (see Energy & Utilities chapter).

At the same time, reform of the telecommunications sector has lowered prices for consumers and expanded mobile phone and internet access. Between 2012 and 2016 telecommunications prices decreased by as much as 75% in some cases, and the number of mobile broadband connections more than tripled, according to a December 2017 report by the OECD.

Reforms to support strategic sectors, the general business environment and entrepreneurs are needed to continue driving the economy forward, and creative solutions are being established to help. “The services sector is one of the key growth drivers of the Mexican economy, with particular dynamism reflected in tourism,” Francisco González Díaz, CEO of Bancomext, a government export-import investment bank, told OBG. “However, more support is needed for small and medium-sized enterprises to keep pace with the growth and sophistication of demand. Therefore, the federal government has created intelligence resources to help companies make strategic investment decisions.”

As well as advancing key reforms and keeping the overall economy on a positive trajectory, Mexico is also working to reduce its debt. According to the IMF, gross government debt is to be curbed to 53.3% of GDP in 2018, down from 58.4% of GDP in 2016.


Reforms are expected to increase competition, attract new investment and make the economy more efficient over the long term, but they may also help address the high rate of economic inequality. With an estimated 127.5m people in 2016, Mexico’s population has more than doubled since 1975. This growth has been accompanied by high rates of urbanisation, which, combined with a relatively young population, has the potential to lead to rapid economic expansion and more even prosperity among all citizens. However, slower growth has been the reality. “Mexico’s economy does not grow at a fast rate; it has not grown particularly quickly in the past 20 years,” Sebastian Briozzo, senior director at Standard & Poor’s Global Ratings, told OBG. “The average annual growth rate is 2.2%, which is low for a market with such macroeconomic stability and a relatively low level of GDP per capita.”

The inability to accelerate GDP expansion is a contributing factor to sustained poverty rates, despite gains in income for certain segments of the population. According to the World Bank, Mexico’s GDP per capita more than doubled between 1999 and 2014 to $10,452, before falling to $8208 in 2016. However, this contraction resulted from the depreciation of the peso that began in 2014, as opposed to a lower standard of living. Yet the number of people living below the national poverty line has been persistently high, although small gains have been made of late. World Bank figures show the rate fell to 43.6% in 2016 from a recent peak of 46.2% in 2014.

Inequality remains a critical, unresolved consequence of the country’s steady economic growth. “Wealth remains very concentrated in Mexico: 1% of the population has 50% of the wealth,” Héctor Alfonso Suárez, vice-president of investment banking at Actinver, a financial services firm, told OBG.

Regional Disparities

Part of the existing inequality is rooted in regional disparities. Although NAFTA helped to establish attractive investment conditions, its positive impact has been felt disproportionately around the country, mostly benefitting northern states where much of the manufacturing capacity was installed. “Overall growth has been slow, but more importantly, it has been very unequal,” Briozzo told OBG. “Some of the old oil states, like Tabasco, and the poorest states in the south have negative growth rates. Other states, such as Guanajuato and the Bajío area, are growing at 6-7%. These are the ‘NAFTA states’ that produce for the US.” Four of the poorest states – Oaxaca, Michoacán, Chiapas and Guerrero – account for a combined 7% of national GDP, but have 15% of Mexico’s population, according to Bancomext.

In an effort to mitigate regional disparities, the government passed the Federal Law on Special Economic Zones (SEZs) in 2016, which aims to create specialised production areas in the country’s poorest regions. The law outlines investment conditions for high-value, long-term projects in less-developed areas through fiscal and Customs clearance incentives. The government also plans to equip the new SEZs with the necessary telecommunications and energy infrastructure, and locate them in areas with population levels of between 50,000 and 500,000 in any of the 10 states with the highest rates of poverty.

The first of these zones – Coatzacoalcos (Veracruz), Puerto Chiapas (Chiapas) and Lázaro Cárdenas-La Unión (Michoacán) – were created by signed decree of President Peña Nieto in September 2017, while Salina Cruz (Oaxaca) and Progreso (Yucatán) were decreed in December 2017. The government expects the zones to create roughly 500,000 jobs and attract investment of up to $50bn over the next couple decades.

Whether these incentives will be sufficient to make a true and lasting impact on the economic dynamics of the country’s most impoverished areas remains to be seen. Northern Mexico’s manufacturing development was driven by the region’s close proximity to one of the world’s strongest economies.

Ensuring the same level of economic activity to the southern states is likely to prove more of a challenge. This places the burden of developing those areas on the government’s ability to attract investment to infrastructure projects to better connect the country with suitable logistics routes for distribution (see Transport & Logistics chapter).

Trade Patterns

Integrating manufacturing capacity with international value chains has allowed Mexico to raise its trade volumes, and SEZs in the southern regions would contribute to boosting trade even further. Total exports were valued at $409.5bn in 2017, a 9.5% increase over 2016. Manufactured goods comprised the vast majority of Mexico’s exports in 2017, at 89% of the total, according to INEGI.

A distant second, petroleum products accounted for 5.3% of exports, followed by agricultural goods at 3.9% and non-petroleum extracted products at 1.3%. Strong export figures were supported by 12% growth in the automotive sector, which sent approximately 3.1m vehicles abroad in 2017, according to the Mexican Automotive Industry Association.

This is testament to the fact that despite uncertainty surrounding future trade relations with the US under NAFTA, manufacturing activities remain resilient. The import bill, for its part, also rose in 2017, increasing by 8.6% to $420.4bn.

Although Mexico has a diversified list of customers for its exports, trade patterns remain skewed by its commercial relationship with the US. The top-15 destinations for Mexican products accounted for 94% of the country’s export shipments in 2017, and included Germany, South Korea, Japan and Brazil. Over three-fourths of all exports, however, went to the US.

Since NAFTA was implemented in January 1994, Mexico has played an ever-growing role in the production networks that extend to the US and Canada. Trade with its northern neighbour has had a profound impact on economic growth, as Mexican exports to the US have risen by 687% since the onset of the agreement, according to the Office of the US Trade Representative. The US is currently Mexico’s largest trade partner, accounting for 80% of national exports, and total trade in goods and services between the two countries reached $616.6bn in 2017. Mexico, conversely, is the US’ third-most-important trade partner, after China and Canada. In 2017 Mexican goods and services exports to the US totalled $340.3bn, while all imports stood at $276.2bn.

Goods exports, in particular, came in at $314bn in 2017. Vehicles accounted for the biggest product category, amounting to $84bn, followed by electrical machinery at $62bn and general machinery at $54bn. Mexico is the single-largest supplier of agricultural goods to the US, with products amounting to $25bn. Fresh fruit and fresh vegetables, the two most important agricultural export categories to the US, accounted for $6bn and $5.5bn, respectively, in 2017 (see Agriculture chapter). The ongoing renegotiation of NAFTA, however, may upend the existing commercial relationship between Mexico and US.

NAFTA Restructuring

The current US administration’s open disparagement of NAFTA has been a key talking point since President Trump assumed office in January 2017, leading to renegotiation discussions between the US, Mexico and Canada. The process has been far from easy, and although in April 2018 Rogelio Garza, Mexico’s deputy minister of commerce and industry, stated in a news conference that a deal would be reached soon, several issues remain at a standstill. The US has announced it will require a revision of trade conditions, as well as the addition of a clause allowing for the annulment of the trade deal unless conditions are renegotiated every five years.

US authorities also aim to change country-of-origin rules that govern the automotive sector. Existing regulations require vehicles sold duty-free within the treaty to have at least 62.5% of their value manufactured in one of the three countries. The US’ goal is to further reduce the volume of auto components imported from outside the treaty area. As of mid-2018 a new deal remained elusive, with the Mexican presidential elections in July making it unlikely an agreement would be reached before the new administration takes over in December 2018. Still, reaching clarity on trade relations with the US is vital for future economic planning.

Alternative Destinations

While a complete collapse of NAFTA is unlikely, Mexico has accelerated efforts to diversify trading partners and reduce any negative consequences that may result from an overhaul of the existing trade arrangement with its continental neighbours. This ongoing diversification process targets large Latin American economies, and has included talks with Brazil and Argentina during 2017. Engagement with Argentina, in particular, could help Mexico secure an additional supply of grain products, such as maize and soy. Mexico also plans to strengthen trade with China, the fourth-largest destination for national exports, purchasing around $6.7bn worth of good and services in 2017.

Whether the diversification of trade partners could make up for any losses from a revised agreement with the US in the short term, however, remains up for debate. “The government is focusing on diversifying Mexico’s export customers, but I do not see this as a strong alternative course of action at the moment,” Félix Boni, managing director at HR Ratings, a Latin American credit rating agency, told OBG.

Foreign Investment

In addition to growing trade volumes, Mexico’s open economy and competitive manufacturing sector have made it a preferred destination for foreign direct investment (FDI). Manufacturing, banking and – after sector reform in 2014 – telecommunications have been the primary targets of foreign capital. FDI inflows grew by 11.1% in 2017, totalling $29.7bn, according to the Ministry of Economy (MoE). The majority of this investment flowed into the manufacturing sector, which accounted for 45.3% of all FDI for the year. Other recipients of capital were transport and logistics, and the construction sector, which received 10.5% and 10.3% of total annual FDI, respectively, followed by financial services and commerce at 9% each, and mining at 3.4%. The progressive opening of the energy sector to private capital is also set to strengthen investment flows, and will likely reduce the relative weight of manufacturing in FDI receipts over the medium term. International interest in Mexico’s energy network was highlighted at recent auctions of exploration and production licences. In addition, the first two electricity auctions, in 2016 and 2017, lead to commitments of around $9bn for new generation projects (see Energy & Utilities chapter).

Similar to the existing trade dynamic, Mexico sees the majority of its foreign investment come from the US. Of the more than $502bn in FDI that Mexico received between 1999 and 2017, $245.6bn has come from the US, according to the MoE. This further underscores the risk that Mexico will be exposed to if NAFTA is renegotiated in that way that disincentivises US investors from doing business in the country. Any other dramatic changes in the political and economic relationship between the two countries could also upset existing cross-border supply chains.

In 2017 US-backed FDI accounted for 46.8% of total foreign investment capital into Mexico. This was higher than the combined capital originating from the next five largest investors – Canada, Spain, Germany, Japan and Australia – which together accounted for 36.5% of FDI. The integrated economic relationship shared by the US and Mexico highlights the difficulties the latter might face in securing new trade and investment partners or growing the engagement of existing partners.

Additional challenges to raising FDI flows could stem from the recent fiscal reform in the US, which reduced corporate tax rates from 35% to 21% to persuade companies to invest in factories and jobs at home. This rate decrease took effect in January 2018. “The 30% corporate tax rate we have in Mexico is really high when looked at in an international context. The only reason we have been able to maintain this was because the US also had high rates,” Boni told OBG. “Now, losing certain cost benefits because of higher tariffs, combined with the bigger disadvantage of higher, uncompetitive corporate tax, can bring a lot of uncertainty for further investment.”

Although the fiscal reform and accompanying tax overhaul in the US have the potential to incentivise some US companies to expand at home for certain operations, rather than move south, it was still unclear in mid-2018 what the long-term affects would be. Whether new fiscal incentives proposed in the US would be in place for an extended period of time was also uncertain. However, Mexico’s lower input costs, access to a multitude of export countries through trade agreements and the recent opening of sectors such as energy and telecommunications are factors likely to keep Mexico positioned as an attractive investment destination over the medium term.


Other improvements to the business environment, such as the strengthening of competition rules, are also making Mexico more welcoming to private investors. Recent developments can be traced back to a 2013 regulatory change that transformed the Federal Economic Competition Commission (Comisión Federal de Competencia Económica, COFECE) into a constitutionally independent entity. COFECE is tasked with oversight of all economic sectors except telecommunications, and has cracked down on several monopolistic practices since its mandate was strengthened. Part of its new powers allow COFECE to engage in unannounced investigative inspections of economic agents. COFECE has recently investigated price collusion in areas ranging from the pharmaceuticals market, tortilla production in the state of Chiapas, and the recently liberalised downstream fuel distribution market.

Updated competition laws have also raised the value of fines for monopolistic practices to as much as 10% of a firm’s revenues, and may now include prison terms for business owners found guilty of such actions, according to the Ministry of Finance and Public Credit. These key changes are on a par with the elimination of long-standing monopolies in the energy and telecommunications sectors. By increasing competition, the ongoing regulatory reforms are expected to make the economy function more efficiently, improve prices for consumers, and free up capital for public and private stakeholders to invest over the long term.


The last few years have presented Mexico with an unprecedented set of challenges: a reduction in oil revenues, a forced re-evaluation of its relationship with its biggest economic partner, peso devaluation and high levels of inflation. Through it all, however, the economy has maintained its solidity, owing largely to sound macroeconomic management.

Although Mexico is stronger now than it was during previous periods of economic turmoil, such as the financial crisis of the mid-1990s, much of its future economic performance will hinge on the beneficial conclusion of the NAFTA negotiations. Even if trade terms with the US change drastically, Mexico is likely to maintain strong economic ties with its northern neighbour through integrated supply chains and consumer demand. Although destabilisation of trade flows would have a heavy impact in the short term, the overall outlook for the Mexican economy remains strong.


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