Key Points


2021 growth outlook looks quite strong but may not be sustainable:

  • Re-opening of services sector to boost tourism & entertainment

  • Record remittances from the US helping prop up consumption 

  • Record trade surplus—with a jump in net exports—due in large part to weak domestic demand


Main problem for the “4th Transformation” is self-inflicted decline in confidence:  

  • Growth was already weak historically (2.1% 20 yr. avg.)

  • Texcoco Airport cancellation & uncertain business environment reduced investment

  • With weakening investment came lower employment creation 

  • “Mexico costs” are rising


Weaker growth outlook in turn spells trouble for public finances

  • Permanent Primary Surplus analysis suggests tax reform or growth boost are necessary

  • Add Pemex trouble to the mix 

  • How will the 2022 tax reform impact investment?


Despite all this, Morena still popular with voters

  • AMLO approval rebounding, approaching 2/3

  • Clever election tactics + weak opposition suggest at least absolute majority in Congress for Morena

  • 2/3 (Constitutional) majority may be in the cards for AMLO H2 


First some good news: 2021 growth looks solid

2021 growth forecasts have been rising:

  • Consensus +4.2%

  • Banxico +4.8%

  • Scotiabank +4.9%

  • FinMin +5.0-5.5%


Base effects / vaccination should drive a big jump in 2021 GDP; particularly in tourism


Re-opening to cause services price shock?


The “K-shaped” recovery story has legs, weakness in tourism & construction


Shock caused by tourism decline hit regions unevenly


Net exports boosting growth, partly due to demand recovery lag


Remittances providing important boost to consumption



Pre AMLO, Mexico already had weak growth


Current Account = Savings – Investment ….


Investment has been falling under AMLO


With low investment comes weakening employment, though reopening will help


Lower costs of production still substantial advantage


Energy reform: pushing on the wrong types of power?


2 years of very strong minimum wage gains eroding competitive advantage


“Mexico Costs” rising:

  • Minimum wage hikes

  • Likely power shortages & cost increase

  • Will relying on dirty power cause “capital cost increase”?

  • Outsourcing Bill (up to 20% of total formal workers affected; 10-30% increase in costs)

  • Pension reform (gradual increase from 5.15% to 13.875% in employer contributions over 8-year span)

  • Tax reform the “last shock”?



Mexico’s credit ratings & Pemex


Government has hinted a tax reform is coming for the second half of the Administration (2022 onwards), and simultaneously that tax relief for Pemex is part of it.

Topics to include in the tax reform are a subject of contention. 

  • Mexico’s 2 main credit rating risks appear to come from:

    • Support for Pemex, which is not only the world’s most indebted oil company, but also fails to generate positive cash flows (in part due to a very onerous tax burden).

    • Growth. Over the past 20 years, Mexico has averaged a modest 2.1% growth, but the recent decline in investment, and with it in job creation, may have pushed potential growth even lower.

  • An analysis of Mexico’s long term debt sustainability suggests that to anchor debt levels, 1 of the following is needed:

    • Boosting growth by about 2-3 points.

    • Increasing the primary surplus by 2-3 points.

    • A fiscal reform that levies an additional 2-3 points.

    • A combination of the 3 points above. 


Rating agencies have flagged a fiscal reform as important to securing the country’s investment grade—expected for 2022

  • Fiscal reform will likely be necessary entering 2022. It is key that it’s balanced to protect private sector confidence.
  • Our estimates, based on the “Permanent Primary Surplus” method suggest a tax reform in the order of 2.0–3.0% of GDP will be needed—including about 1 ppt of GDP for Pemex.


Pemex overview & challenges



  • Very high debt burden.

  • Needed support (and/or tax relief) estimates seem to range from USD 10 bn to USD 20 bn (Scotiabank USD 14 bn).

  • Weak credit metrics & liquidity.

  • Downstream business lines consistently fail to generate positive cash flows.

  • Oil output could be touching bottom, but proven reserves continue to drop, raising some concerns over long term viability.


Pemex’s challenged cash flow generation capacity


Pemex production metrics & debt maturity profile


10yr M-bonos look “cheap to fair value”, but constant decline in foreign participation suggests downgrades being priced-in



AMLO approval rate rising, supporting mid-term prospects for Morena


Morena looks likely to retain at least an absolute majority, could get to a “Constitutional”/ Qualified one



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