Since the mid-1990s, Mexico has undergone a remarkable structural transformation. From being relatively closed and heavily dependent on oil exports to drive growth and accrue foreign currency, the country has progressively liberalised and integrated into regional and global value chains. At the same time, oil production has been in long-term decline, while the fiscal reforms first unveiled in 2013 have served to further reduce the dependence of the public coffers on income from the energy sector. Membership in the North American Free Trade Agreement (NAFTA) since 1994 has had a particularly transformational impact. As well as being a member of the pro-free-trade Pacific Alliance – comprising Chile, Colombia and Peru – Mexico is also party to a network of 12 free trade agreements with a total of 46 countries. Although economic openness left Mexico more exposed to the global financial crisis than some of its Latin American peers, its economic profile has since allowed it to bounce back as global trade and investment flows recover. Meanwhile, it has avoided the recent economic weakness of more commodity-dependent economies in the region.
An ambitious programme of structural reforms under President Enrique Peña Nieto since 2012 has further liberalised the economy, opening up sectors such as energy and telecommunications to competition. Even if these reforms have not yet had the dramatic impact on economic growth the administration aimed for at the outset, their progressive implementation showed signs of bearing fruit in 2016, and should continue to spur the economy forward over the medium term.
Throughout 2015 and 2016, sub-par performance in the US manufacturing sector – the key determinant of Mexican exports – has constrained external demand for industrial output. While government consumption has been relatively subdued in the face of fiscal consolidation, private consumption has taken up much of the slack, supported by increases in employment, real wages, remittances and household credit. This has been an important driver of the relatively strong services sector, making up for recent lacklustre performance in manufacturing, as well as the continued decline in oil production.
Mexico’s economy has been growing relatively slowly and steadily since 2013. Sound macroeconomic policy management has seen inflation remain close to, albeit above, the 3% target of the central bank, Banco de México (Banxico), through 2016 and into early 2017, while fiscal consolidation is expected to create a primary surplus in 2017 and put public debt as a proportion of GDP on a downward trajectory by 2019. Nonetheless, the increasingly challenging external environment was an important determinant in the downward revision by Fitch Ratings of its credit outlook for the country from stable to negative in December 2016.
By The Numbers
GDP growth in Mexico contracted sharply in 2009, reaching a nadir of 7.9% in the second quarter of that year, according to National Institute of Statistics and Geography ( Instituto Nacional de Estadística y Geografía, INEGI) figures, as the global financial crisis caused trade flows to decline dramatically. This was on a par with the 8.1% contraction experienced in the second quarter of 1995 at the height of the Tequila crisis, albeit ultimately shallower, sustained for a shorter period and not accompanied by a banking crisis.
As in the mid-1990s, Mexico’s economy bounced back strongly the following year, and GDP growth peaked at 6.7% in the second quarter of 2010, according to figures from INEGI. Since then, however, headline economic growth has trended downward in the face of a sluggish global recovery, with international trade growth continuing to lag far behind pre-crisis rates. Quarterly GDP growth has not registered above 3% since the fourth quarter of 2012.
According to INEGI, real GDP growth was 2.3% for 2016 as a whole, above the expectation of 2.1%, but down from 2.6% in 2015. Projections for 2017 are couched in more uncertainty than is usual, in light of the lack of clarity over and the potential impact of policy changes in the US during the first year in office for US President Donald Trump. In forecasts released since the November 2016 US election, the World Bank projects Mexican GDP growth will ease to 1.8% in 2017, while the IMF has forecast 1.7%. Banxico reduced its projected range by half a percentage point, from 1.8-2.3% to 1.3-2.3%. Private sector actors share a diversity of views, with some, such as Barclays Mexico, maintaining a business-as-usual outlook for growth at 2.3% for 2017. Meanwhile, Banxico’s survey of private sector analysts in February 2017 yielded a median forecast of 1.5% for 2017.
In nominal terms, Mexican GDP reached $1.14trn in 2015, according to IMF figures, enough to see the economy ranked 15th globally, between Spain and Indonesia. This was the same as its 2014 ranking, despite the sharp devaluation of the peso during 2015. In constant purchasing power parity terms, however, Mexico’s ranking improved from 12th to 11th over the same period, leaving the country sandwiched between Italy and South Korea.
Population & Growth
With an estimated population of over 121m, Mexico is the 11th most populous country in the world, according to UN data. Moreover, with a fertility rate of 2.3, and emigration relatively subdued at just over 100,000 per annum, the population is still growing relatively strongly at 1.3% annually. While fertility and population growth are expected to continue their long-term decline, mirroring trends in most advanced economies, the UN estimates that population growth will remain positive through the middle of the century, when it is expected to surpass 160m.
Mexico also has a relatively youthful population, with a median age of 27.8 in 2016. As in other advanced economies, however, this demographic dividend will fade, with the median age already having increased from 23 at the turn of the century and expected to reach 41 by 2050.
While Mexico’s economy is comparable in size to the economy of Spain, its population is larger by 161%. Consequently, GDP per capita is an order of magnitude lower. At an estimated $9452 in 2015, GDP per capita is among the lowest in the OECD, according to data released by the IMF. Its decline from $10,844 in 2014 should, however, be seen rather as a function of depreciation in the value of the peso rather than a decline in overall living standards, since real economic growth continued to outpace population growth in 2015.
Looking at the aggregate figures obscures the inequalities in economic performance and living conditions by region, as well as across segments of the population. There is a longstanding narrative around two Mexicos: On the one hand, there is an industrialised, competitive, productive and globally integrated economy in the states bordering the US and in the central corridor. On the other hand, the economy in the south of the country is dominated by more traditional, small-scale, less productive firms in the informal sector. According to the OECD’s “Economic Survey of Mexico 2017”, the five fastest-growing states have grown by about 25 percentage points more since 2005, while the five slowest-growing states have barely grown at all, and in some cases declined, having struggled to recover from the effects of the global financial crisis. These trends were compounded during 2016 as the northern, north-central and central regions of the country continued to grow at a faster pace than the national average, while the southern region contracted due to continued weakness in its petroleum, mining and manufacturing sectors, as well as a deceleration in growth in the tourism sector.
At an aggregate level, Mexico is the second most unequal country of the 35 advanced economy members of the OECD, after Chile. Moreover, inequality in the population, as measured by the Gini coefficient, has seen little improvement over the past 10 years, whereas significant progress has been seen in Brazil, for example. This is one of the main reasons why nearly half of the Mexican population, or around 46%, still lives in poverty, with this figure having grown by 2m between 2012 and 2014 alone.
Structural reforms have started to bear fruit, and 2016 saw some important advances in the implementation of landmark reforms in the energy and telecommunications sectors. These should spur productivity growth, as well as both domestic and foreign direct investment (FDI) over the medium term. Weak oil prices and declining production have undermined the contribution of the energy sector to economic growth in recent years, but late 2016 saw encouraging signs, with crude prices achieving levels double their recent cyclical lows and investor appetite in the country’s oil and gas fields gaining strength.
In December 2016 private investors saw their first opportunity to get a foothold in Mexico’s deepwater fields, and it proved highly successful in attracting the big oil majors. Media reported that out of 10 blocks, eight attracted bids, while Petróleos Mexicanos (Pemex) secured its first joint venture with an international partner to develop its Trion field. Capital investment for each of these deepwater fields is expected to reach $4bn, and they are set to start producing oil in the mid-2020s, the Ministry of Energy has reported (see Energy chapter). Victor Herrera, managing director of Standard & Poor’s (S&P) Mexico, told OBG, “Despite the inherent risks of the oil industry, the early successes in the implementation of energy reforms means not all of the risk is absorbed by Pemex; it is often shared with domestic and international stakeholders. Crucially, the government has reacted swiftly and decisively to mitigate the effects of the drop in oil prices.”
A second flagship reform of President Peña Nieto was implemented in July 2014 in the telecommunications sector, with the aim of introducing competition, reducing prices and fostering investment in infrastructure. Subsequently, new entrants to the market included the US-based AT&T, France’s Eutelsat and the UK’s Virgin Mobile. This helped increase FDI flows to the sector by a factor of 10 since 2013, to reach $2.8bn, or roughly 9.6% of total FDI inflows, by 2015, according to a June 2016 report from the Federal Institute of Telecommunications (Instituto Federal de Telecomunicaciones, IFT).
Prices in fixed and mobile telephony have come down significantly, keeping a lid on economy-wide inflation pressures during the 2014-16 period and squeezing the margins of incumbent firms. In November 2016 international media reported that the tendering process for the Red Compartida, or Shared Network project, was concluded, with the Altán Consortium being awarded a 20-year concession to roll out 4G LTE. The contractor will get access to 90 MHz of contiguous spectrum in the 700-MHz band. It is a public-private partnership (PPP) in which the government will provide the spectrum and fibre optics, later supplemented by further infrastructure investments by the Altán Consortium. This should support competition in the sector as new market entrants will not have to invest up front in infrastructure themselves, but can rent use of the existing network from the contractor. The project is expected to become operational in March 2018, providing mobile broadband coverage to 92.2% of Mexico’s population within seven years, and generating $7bn in income over its lifetime.
Spurred by the 2014 reforms, the telecoms sector contributed 3.6% of GDP in the first quarter of 2016, according to the IFT, a historic high, as growth in the sector outpaced expansion in the wider economy over the 2011-15 period. In 2015 alone private sector investment in the sector increased by 34.8% to reach MXN66bn ($4bn), with most of the extra investment coming in fixed telecommunications. As the Red Compartida is rolled out, investment in mobile telecoms can be expected to pick up its pace in 2017 and 2018 (see Telecoms & IT chapter).
Despite Banxico’s 250-basis-point interest rate hike in 2016, credit growth remained in the double digits as 2014 financial sector reforms supported lending and, in turn, strong private consumption. Key elements of the 2014 reforms were to strengthen the regulatory capacity of the National Commission for the Protection and Defence of Financial Services Users and the National Banking and Securities Commission, as well as to foster competition in the sector and bring down the costs of lending.
Total credit as a share of GDP increased from 26.4% to 32.7% between 2012 and 2015, according to World Bank data. While this marks some progress towards President Peña Nieto’s target of 40% by the time he leaves office at the end of 2018, it is only marginally higher than levels seen as far back as the 1970s. However, the cumulative impact of successive interest rate rises, combined with elevated uncertainty surrounding commercial investment and economic growth, is likely to see a moderation in credit growth through 2017. At the same time, non-performing loans fell in 2016 as banks further refined their lending strategies. Furthermore, the banking sector is well capitalised, strongly regulated and well ahead of the game in terms of implementing Basel III regulations (see Banking chapter).
Challenging External Environment
With an economy highly open to trade and FDI, Mexico’s economic fortunes will naturally depend to a large extent on external developments, as evidenced by the impact of the global financial crisis. The relatively sluggish global recovery since 2009 has limited the scope for net exports to drive domestic growth.
Given that the US is the destination of some fourfifths of Mexican exports, and the source of the bulk of its remittances, the country is particularly exposed to the economic performance and policy stance of its northern neighbour. Even in early 2017 a large degree of uncertainty prevailed as to the likely policy orientation of the new administration of President Trump, and its potential impact on Mexico’s economic prospects. The extent to which the new US president will follow through on his campaign promises to renegotiate NAFTA, deport millions of Mexican immigrants, and impose taxes or charges on remittances will be key variables. At the same time, implementation of his commitment to fiscal stimulus through infrastructure investment and tax cuts could bring a significant upside for the Mexican economy, and a fall in the peso may make exports more completive and the country an attractive location for investors and companies to set up shop. As with many emerging markets, Mexico continues to suffer the effects of the normalisation of monetary policy by the US Federal Reserve, contributing to capital outflows, currency depreciation and a need for Banxico to raise domestic interest rates, despite few signs of the economy overheating.
While Banxico occasionally intervenes in the foreign exchange market to prevent excessive volatility, the Mexican peso is considered to be a free-floating currency. It is also the second most widely traded emerging market currency, and as such, is sometimes considered by traders to be a proxy for emerging market sentiment. The vast majority of peso trades are with US dollars.
From its cyclical high of around MXN12:$1, recorded in May 2013, the peso has lost nearly half of its value, trading at over MXN20:$1 for the first time ever in the aftermath of the US presidential election in November 2016. The currency traded above this level consistently throughout the end of 2016 and into the first quarter of 2017, trading at all-time highs of around MXN22:$1 in the run-up to the inauguration of President Trump, prompting a bout of intervention by the central bank. Although the peso has strengthened somewhat in the intervening months, with the US Federal Reserve expected to continue tightening US monetary policy in 2017, further depreciation cannot be ruled out.
The exchange rate acts as the principal shock absorber in the Mexican economy, allowing relative prices to adjust via market mechanisms. Thus, Banxico does not target any given exchange rate vis-a-vis the US dollar, but limits itself to addressing currency weakness through its monetary policy only insofar as this is necessary to contain pass-through effects from depreciation to medium- to long-term inflation expectations. As a point of reference, the peso’s depreciation over the 2014-16 period is of a magnitude similar to that seen in 1994-95, whereas inflation peaked at more than 50% during the so-called Tequila crisis.
Having reached a historic low of 2.1% in late 2015, core inflation climbed slowly and steadily in 2016 to surpass the 3% mid-point of Banxico’s target range of 2-4% by the end of the year (see analysis). Inflation is widely expected to continue ticking upward through 2017 on the back of temporary factors such as the steep rise in the minimum wage, continued peso weakness and the first move towards liberalising petrol and diesel prices (see Energy chapter).
The public sector borrowing requirement is expected to come in around 3% of GDP for 2016, down from a high of 4.6% of GDP in 2014, according to the Ministry of Finance and Public Credit (Secretaría de Hacienda y Crédito Público, SHCP). A surplus at Banxico, equating to 0.4% of GDP, allowed the government to comfortably beat its 3.5% deficit target for 2016. The SHCP is aiming to further tighten fiscal policy in 2017, targeting a borrowing requirement of 2.9% of GDP and the first primary surplus in eight years – meaning a surplus before interest payments on sovereign debt are taken into account. The borrowing requirement is to be further reduced to approximately 2.5% of GDP in 2018. Meeting these deficit targets should put the debt-to-GDP ratio on a downward path by 2019, assuming economic growth does not disappoint. Since the 2014 fiscal reforms, tax revenues have consistently surpassed expectations, while one-off windfalls, such Banxico’s surplus, have also boosted coffers. According to the OECD, the tax reforms have added three percentage points of GDP to non-oil tax revenues, somewhat offsetting the decline in energy receipts. With the authorities having committed not to raise taxes further, and with both one-off windfalls and oil revenues expected to decline in 2017, the burden of incremental fiscal consolidation efforts will increasingly fall on spending.
The SHCP envisaged additional spending cuts of 1.7% of GDP for 2017, which are expected to dampen economic growth. Public investment is being hit particularly hard, with the authorities aiming to mobilise private sector investment to take up the slack – whether through PPPs in infrastructure or Pemex engaging in joint ventures in oil exploration and production. Returning Pemex to firm financial footing will be crucial not only to realising its business plan, but also to shoring up public finances.
Public Debt & Sovereign Ratings
Gross public debt hit 54% of GDP in 2015, up from 42% in 2010, according to SHCP figures. While this is not cause for alarm, it requires continued fiscal policy vigilance. In April 2016 the government introduced the new Financial Discipline of Federal and Municipal Entities Law, which puts a cap on public debt and creates a framework for dealing with it, including a new public registry. Herrera told OBG, “Compared to some of its Latin American neighbours, Mexico has moderate levels of public debt, but it is not to be taken for granted. The population is aware of how quickly Brazil’s and other countries’ economic situation deteriorated, and many prefer to see the country grow more slowly but with stability.”
Over the past decade Mexico’s sovereign rating has remained relatively resilient, notwithstanding the global financial crisis. However, low oil prices and sub-par growth have taken their toll on the public finances. In 2016 this led the main credit ratings agencies – S&P, Moody’s and Fitch, which currently rate Mexico at “BBB+/A2”, “A3” and “BBB+”, respectively – to revise their outlooks from stable to negative, raising the spectre of a possible downgrade over the medium term. Moody’s led the way with its downward revision in March 2016, and S&P and Fitch each followed in August and December of 2016. Nonetheless, Mexico’s government debt continues to trade on the market at levels indicative of a higher rating. The prospect of a possible credit ratings downgrade is likely to keep pressure on the government to deliver on its fiscal consolidation target even as it faces political pressure in the lead-up to gubernatorial elections in three states in 2017 and a presidential election in 2018.
Flows of money from Mexican emigrants to family and friends back home are an important source of both household income and foreign currency. Representing 2.3% of GDP in 2015, according to Banxico, remittances have helped sustain strong private consumption and, since late 2014, have come to represent a more important source of foreign currency than oil exports.
Mexico is the fourth-largest recipient of remittances in the world, with these inflows thought to benefit an estimated 1.3m Mexican households, according to December 2016 figures from BBVA Research. As would be expected, states in the south and centre of the country – the source of the bulk of migrants currently – account for a disproportionate share of receipts of remittances.
More than 95% of these remittances come from the US, and were expected to total $25.7bn in 2016, up from $24.8bn the previous year. According to Banxico, in November 2016 alone, the month in which President Trump was elected, remittances surged 24.7% compared to the same month the previous year, as Mexicans in the US took advantage of peso weakness and pre-empted possible policy changes under the incoming administration.
On the campaign trail, Trump had hinted at the possibility of imposing charges or restrictions on outflows of remittances from the US; however, as of March 2017, it was unclear to what extent, if any, these would become a reality. In a January 2017 press release, President Peña Nieto said, “We must assure the free flow of remittances.” He also called them “an invaluable contribution to national development and indispensable for millions of Mexican families”. Some commentators claim that any attempt to halve remittances will merely force money to be transferred to alternative, informal channels. In January 2017 Alberto Ramos, head of Latin America research at Goldman Sachs, told US media, “If you tax that money, it won’t necessarily stay in the US; it can still go to Mexico through informal channels.” He added that when wire services began to charge higher fees a decade ago, Mexicans families dependent on remittances still received their money, either in-person, through the mail or via travelling relatives.
Visitors to Mexico are another prime source of foreign currency, and one experiencing significant growth. The country received more than 32m international tourists in 2015, a 9.6% increase over 2014. Preliminary data from the Ministry of Tourism suggests an increase of a similar magnitude for 2016, putting total international visits at a record high of 35m. Collectively, inbound tourists spent some $17.7bn in the country in 2015, up 9.4% on 2014, while Banxico data shows a further 10.4% increase in 2016 to $19.57bn.
Mexico is deeply integrated into North American supply chains, with both its exports and imports heavily influenced by industrial output in the US. Weak manufacturing performance in the US thus contributed to a decline in exports and imports of 4.2% and 1.2%, respectively, in 2015. According to the IMF’s 2016 Article IV consultation, the country’s trade figures were on track to ease further in 2016, with a 5.2% decline forecast for exports and a 3.7% drop for imports. A sharp recovery is projected for 2017, when exports and imports are set to grow by 7.7% and 7.3%, respectively.
In US dollar terms, the IMF projects that Mexico’s negative balance of goods and services will widen slightly from $23.8bn in 2015 to $25.5bn in 2016, and remain relatively flat in 2017 at $25.1bn. Mexico’s trade balance in hydrocarbons moved into negative territory in 2015, at -0.9% of GDP, a position the IMF expects will deteriorate further, to -1.1% and -1.5% of GDP in 2016 and 2017, respectively.
Meanwhile, the non-hydrocarbons trade balance was forecast to decline from -0.4% of GDP in 2015 to -0.8% in 2016, before improving to -0.3% in 2017. Overall, the trade deficit is expected to reach 1.9% of GDP in 2016, from 1.3% in 2015, and remain static at 1.8% in 2017. Underpinning these trends is a continued structural shift away from commodities to value-added manufacturing in terms of the contribution to overall economic growth.
Balance Of Payments
Having increased sharply from -2% to -2.9% of GDP between 2014 and 2015, the IMF projects that Mexico’s current account deficit will remain relatively stable at around 3% of GDP in 2016 and over the medium term. Meanwhile, the IMF is somewhat bullish on the prospects for net FDI flows (see analysis), which it forecast would increase from around 1.7% of GDP in 2015 to 2.1% in 2016 and 2.4% in 2017, before stabilising at close to 2.6% over the medium term. Nonetheless, net FDI flows are expected to remain insufficient to cover the current account deficit, pointing to continued reliance on more volatile portfolio investment flows, and further underlining the importance of remittances to Mexico’s external balances.
Mexico’s foreign reserves fell from $196bn to $178bn, or 15.5% of GDP, over the course of 2015, largely as a result of intervention in the currency market to smooth out excess volatility. The level of reserves has remained relatively stable since, and stood at $176.5bn at the end of 2016. At nearly double the level of outstanding short-term debt, the IMF judges that this remains adequate for normal scenarios. As an extra safety buffer, however, Mexico has maintained a flexible credit line with the IMF since 2009, which it renewed in May 2016 for an amount equivalent to $88bn. This precautionary arrangement allows Mexico the flexibility to draw down funds in the event of a crisis, with $260bn on hand if the flexible credit line is taken into account.
In light of the prevailing uncertainties around US trade policy, and the implications for NAFTA, there have been calls for Mexico to diversify its trading partners away from the US, which accounts for more than 80% of Mexican exports (see analysis). Given how the country’s infrastructure is geared towards exporting to the US, such diversification would bring its own challenges, but even with existing trade patterns, industrial expansion will require significant infrastructure upgrades. “The capacity development of infrastructure is fundamental to aiding growth of key industries,” Herrera told OBG. “In Mexico, we move $1.5m of international commerce per minute, but with certain industries’ plans to double their output, the country needs to ensure the infrastructure has the capacity to move up to $4m a minute by the end of the next decade.”
Mexico is very open to, and has proved successful at, attracting foreign investment, particularly in its manufacturing and banking sectors. Telecoms reforms have already seen increased foreign inflows to the sector, while energy reforms and the auction of exploration and production rights for Mexico’s oilfields will certainly stimulate future inflows for that sector. Combined with uncertainties related to US trade policy under the new administration, and their potential impact on cross-border industrial supply chains, we are likely to see manufacturing’s share of FDI inflows fall with respect to that of the energy and services sectors (see analysis).
According to figures from the Ministry of Economy, states bordering the US depend on FDI for a majority of their capital inflows, with the share in the states of Chihuahua (68.8%) and Coahuila (68.7%) above two-thirds in 2016. At the same time, the pattern of both FDI inflows and migrant outflows, which lead to relatively large inflows of remittances, mean that some states depend on FDI for foreign currency to a far lesser extent, such as Oaxaca (6.8%), Zacatecas (9.9%), Guerrero (17%) and Morelos (17.4%), for example. These trends both reflect and compound existing regional economic inequalities.
Labour & Human Capital
By the end of 2016, Mexico’s unemployment rate had reached 3.5%, down from 4.2% a year before, according to INEGI figures. This was among the lowest rates in the OECD, and the lowest level seen in Mexico since mid-2008. According to the Mexican Institute of Social Security, in January 2017, 83,292 new positions were created, the most for a single month since January 2008. There were also signs of progress in the reduction of the elevated level of labour market informality to 57%, down from 57.9% the previous year, according to INEGI. Another challenge will be to boost the female labour market participation rate, which lags far behind that of men in Mexico, with 43% of working-age women economically active, compared to 78% of men. Moderate inflation in recent years has also seen increases in real wages, which has in turn supported private consumption. Breaking the established tradition of hiking the minimum wage in line with inflation, January 2017 saw a nearly 10% rise from MXN73 ($4.40) to MXN80 ($4.82) per day. While this should only have a direct impact on the segment of the labour force that works for minimum wage, it is possible it will give rise to bigger wage demands across the economy, particularly with signs that inflation is ticking up.
Further reforms are afoot in the labour market that would see Articles 107 and 123 of the constitution amended, transferring responsibility for labour arbitration and conciliation to the judicial branch. This would end the practice of tripartite conciliation among employers, trade unions and the executive branch (see analysis). Apart from Brazil, Mexico’s federal labour law is widely regarded as one of the most complex in Latin America. Many foreign investors find it challenging to understand the intricacies and the bureaucracy and the government is attempting to streamline these processes to allow the Mexican market to become more global.
Over the longer term it will be essential for Mexico to upgrade the skill levels of its workforce, including basic education outcomes. The 2015 Programme for International Students Assessment exam showed that Mexican students scored among the lowest in the OECD on reading, mathematics and science, while only mathematics scores have improved significantly in recent years (see Education chapter).
In 2016 there were significant public protests against education reforms designed to improve teaching standards and accountability. Nonetheless, their rigorous implementation can support economic development across the country over the medium to long term. Education in Mexico remains politicised in some segments, and law makers are changing their vision towards capacity building to allow the workforce to make use of their capabilities and potential.
Rule Of Law & Corruption
While the current government’s reform record has been robust, progress has so far been slower than hoped for in terms of tackling corruption and cementing the rule of law. Efforts are ongoing to improve the professionalism of, and reduce corruption among, the police force across the country, including the development of integrated, state-wide forces. This should help improve the security situation, but will take time to take full effect. Similarly, the new National Anti-Corruption System is due to come into force in July 2017. This will see the appointment for the first time of an independent anti-corruption prosecutor, as well as the introduction of new sanctions for individuals and entities engaging in bribery, collusion and other illicit activities. “Reforms could be seen as a watershed moment for transparency, as incentives for state and local governments and companies to improve their practices have increased significantly,” Fernando Montes de Oca, CEO of HR Ratings, told OBG. “In the case of state administrations, the fact that they are rated obliges them to remain compliant with new rules and make an effort to increase their transparency,” he added.
Uncertainty is likely to constrain investment in 2017, at least until there is clarity as to the impact of changes in US trade and investment policy. At the same time, past structural reforms are starting to bear fruit and bode well for growth prospects in the medium to long term. Once the short-term turbulence has been negotiated, a modest acceleration in growth is likely, while continued fiscal and monetary policy vigilance should see debt sustainability assured and inflation pressures contained.