Global Economic Outlook – September 2022 Exports are expected to grow by 9.6% in 2022 and slow Chart 14: Mexico has more fiscal space down to 4% in 2023. Strong demand from the U.S. than most of its neighbors consumer for cars, along with an uncoiling of supply chains, has helped this year. Mexico is an oil exporter and 90% has benefitted from higher oil revenues in 2022 as prices 80% 81% skyrocketed. This has helped offset the 2% of GDP the 80% 70% government spent on fuel subsidies. Additionally, imports 65% are expected to grow by 8% in 2022 and slow down to 60% 3.7% in 2023. 50% 51% 40% Pre-pandemic political reforms from the current government % Debt to GDP 36% 36% 30% tightened the fiscal belt during a time when other governments were funneling funds to their troubled 20% sectors. The silver lining is it allowed the country to keep 10% its low investment grade debt rating. However, investment 0% has been poor, as fiscal reforms have pushed out Argentina Brazil Colombia Mexico Chile Peru private investment. Source: KPMG Economics, Ministerio de Economía y Finanzas Públicas, Banco Central do Brasil, Banco Central de Chile, World Bank, Departamento Administrativo Nacional de Estadísticas, Bank of Mexico, Instituto Nacional de Estadística Geografía e Informática, International Monetary Fund/ Mexico’s public deficit will hit about 3.1% of GDP in 2022. Haver Analytics. A positive fiscal impulse has allowed Mexico’s government to provide fuel and energy subsidies to households in the first half of the year; the windfall received from rising oil The central bank’s response to inflation has been strong, prices has allowed the spending to net out. In case of a with Banxico’s August meeting resulting in a 75 basis point recession, Mexico has the fiscal space for a countercyclical hike to 8.5%. Rates are expected to hit 9.5% by the end policy response. However, Mexico did not enact as strong a of 2022. Mexico is at a different stage of the business response as its neighbors when the pandemic first hit, and cycle than the U.S.; a slowdown in world economic growth therefore is unlikely to do so due to a global slowdown. could be enough to help the central bank achieve its inflation target. Inflation surged to 8.6% in the first half of August compared to a year ago. Much of that was caused by soaring food A recession is not in our base case but is the downside prices, as energy prices have come off their peak. Inflation scenario, especially if the U.S. enters one at the end of is not expected to come down to the Banxico’s target of 3% the year. A recession in the U.S. would wipe out almost all (+/- 1 percentage point) until 2024 or later. growth for Mexico in 2023. About 80% of Mexico’s exports go to the U.S., therefore any drop in consumer or business activity in the U.S. will impact the Mexican economy and create a lasting damage to industrial production and private investment. A more severe global slowdown would pose even more downside risks for Mexico. Yelena Maleyev Economist, KPMG US © 2022 Copyright owned by one or more of the KPMG International entities. KPMG International entities provide no services to clients. All rights reserved. 16