The Mexican economy has always depended to a large part on oil prices, which recently took a dive. Yet, in spite of this and other negative factors impacting Mexico’s economy, the Latin American country is well prepared to weather the storm.
Factors Negatively Impacting the Mexican Economy
Numerous factors are currently impacting the Mexican economy and ensuring a depressed rate of growth. But this is true of the world at large, and Mexico is surprisingly the fastest growing country in Latin America. In addition to a global economic downturn, the country must overcome the steep depreciation of their currency that came about in recent months. The tightening of US monetary policy in particular is negatively impacting Mexico’s peso. But the most significant challenge the Mexican economy must overcome is the recent decline in oil prices and the resulting decline in energy sector investment and government revenue from public energy reserves.
But these days, Mexico is more than oil.
Factors Enabling a Robust Mexican Economy
In spite of these challenges, Mexico has shown striking resilience in recent months. While many expected the collapsing price of crude in the past two years to cause havoc, there are several other factors at work buttressing the Mexican economy. The country is currently experiencing growth faster than any other major economy in Latin America. Mexico is still Latin America’s second largest economy, and has taken careful steps to maintain and expand this position.
Over the past several years, the country has overhauled their transportation sector, strengthened intellectual property laws, built new telecommunications infrastructure, and privatized much of their energy sector. These combined with the country’s aggressive pursuit of trade agreements with countries which integrated the country’s economy with global value chains make for a highly diversified economy well suited to lean on multiple strengths. Additionally, the growth of other sectors like automotive manufacturing is further bolstering the economy.
Oil Prices Not As Important
Indeed, while oil sales have typically accounted for an average of 30% of federal revenues in Mexico, that number dropped in the past two years to just under 20% in 2016. And low prices and reduced production were only part of the cause for that decline. To alleviate the impact of low oil prices on the Mexican economy, the Mexican government:
- Increased the maximum income tax to 35%
- Raised sales taxes along the US border
- Applied an 8% tax on junk food
In fact, due to these measures aimed at weaning the country off of oil revenues, the rise in non-oil revenues surpassed the drop in oil-sale revenues by 4% of total revenue. Non-oil revenue grew 27% in 2015, exceeding the fastest growth since 2003 by approximately 100%.
While Mexico continues to face a myriad of factors that will no doubt reduce overall growth from its full potential, the country is in a unique position to make the most of the situation. The Mexican economy faces challenges from a normalization of US monetary policy to declining oil prices to slowing global trade, yet proactive steps have prepared the Latin American country for continued growth and stability that will transcend and overcome these challenges.
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