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Economic change: Mexico is missing the main target

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. At 15% credit growth per year it still takes 16 years to get to 60%.

Matos predicts that Mexico will reach the 60% ratio quickly – implying credit growth of around 15%.

Crucial engine

Bankers point out that unlocking that credit potential would give Mexico a crucial engine for growth. Mexico’s financial sector is strong and sufficiently well-regulated to manage the related systemic risks of such rapid growth. Mexico has very strong banks and great domestic financial markets (liquid and fully convertible), and its sovereign investment-grade rating gives its bigger companies access to international markets.

The framework for rapid economic expansion of the corporate sector is just sitting there waiting.

A big part of Brazil’s story between 2002 and 2012 was domestic credit growth and strong internal consumption. Replicating this dynamic would also give Mexico an important domestic source of growth at time when the risk of importing volatility from abroad is growing.

But Mexico’s informal economy effectively blocks the economy’s potential for a credit-driven source of growth. Estimates vary but more than 50% of workers and companies are still located in the informal economy and therefore don’t pay tax. Stricter anti-money laundering and ‘know your client’ regulations mean banks cannot extend credit to either. Most small and medium-sized enterprises can’t invest.

And many workers can’t take on credit (fintechs are constrained in targeting the unbanked) or are forced to use loan sharks.

Sadly Mexico’s new government isn’t offering a cohesive response to the country’s problems

However, governments (past, present and future) have been at best half-hearted about tackling informality. Incredibly, some Mexican government contracts are still settled in cash.

Incoming president Amlo has some plans for youth apprenticeships that might increase formal employment at the margins, but it’s not the type of scheme that is going to make a wholesale difference.

What Mexico desperately needs (and what no-one seems to be proposing) is the kind of reform of tax and social security that brings workers and companies into the formal sector. By introducing a combination of incentives, electronic registration and digital payments, the government could significantly frustrate the informal cash economy.

Such a move to financial transparency across Mexico’s economy and society would also give a significant boost to Amlo’s stated aims of reducing corruption and improving security. Policies on both would be much more effective if there was greater financial transparency.


In the US, since the time of Al Capone, many types of criminals have been brought to justice through tax indictments. (And it’s still happening – Paul Manafort and Michael Cohen were mostly prosecuted for financial crimes including tax evasion.)

Sadly Mexico’s new government isn’t offering a cohesive response to the country’s problems. Instead it proposes to spend time and political capital by pursing policies such as moving ministries around the country and cutting civil service pay.

Not only do these policies miss the larger opportunity for reform but they also raise implementation risks and threaten to worsen corruption in the public sector.

The new government’s focus clearly needs to be on reducing informality. The financial sector quietly recognizes this but, fearful of antagonizing the incoming administration, it is reluctant to champion this cause too vocally. Instead we get obsequious, full-page newspaper adverts from Goldman Sachs congratulating Amlo on his victory.

Last time I checked Latin America was still overwhelmingly a democratic region. Its democratic leaders need the financial sector’s leaders to be strident about the changes that they believe will improve the economy for companies, investors and the broader social good.

That requires advocacy not servility.

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