Since the election of President Andrés Manuel Lopez Obrador (AMLO) we have maintained our cautious stance on his policy fluctuations between business-friendly commitments to austerity and more controversial decisions (see airport project cancellation). In the last thirty days, Congress adopted a fiscally prudent budget, promising a +1% of GDP primary surplus. Then AMLO implemented a quick fix to solve fuel theft – shutting or better guarding pipelines – that is causing gas shortages and is unsustainable. Such fluctuations harm investor confidence; growth could be subdued (~ +2%) for the next two years. Boosting private credit would help lift the cap on growth. Credit to Non-Financial Corporations only accounts for 26% of GDP in Mexico, against 40% in Brazil and 95% in Chile. Yet monetary policy should remain tight this year, constraining access to credit as policy risks and inflation pressures remain; the Central Bank hiked the policy rate last month to 8.25%, the highest in ten years.
