Key Drivers of Mexico’s 2022 Outlook

Introduction

The major drivers of Mexico’s outlook in 2022 will be 1) growing political polarization and social conflict, 2) a more centralized and arbitrary regulatory environment, 3) poor economic performance, with increasing pressure on public finances, 4) more inefficient and distorted energy markets, 5) a flattening of crime and violence at very high levels, and 6) a continued health crisis, driven by the ongoing pandemic and a health care system in shambles. Each of these drivers is discussed below.

The Political Landscape

The year 2022 will see growing political conflict, driven largely by President López Obrador’s penchant for attacking his rivals — real and imaginary. His rhetorical assaults against political figures, opposition parties, the media and public intellectuals, independent regulatory commissions, civil society and the middle class, private investors and corporations, and perceived critics and enemies will continue through the year, adding to an already toxic environment. This will be further exacerbated by his political activism in favor of his chosen successor, Claudia Sheinbaum, the mayor of Mexico City.

Two key moments in 2022 will be crucial to understanding political shifts in the country. One is the April recall election, which the president keeps touting, erroneously, as a ratification of his presidency. There will be low enthusiasm for this additional call to the polls and very low participation, further irritating the president. Second are the elections of 2022 in six states, all currently governed by opposition parties. Although the National Action Party, the Institutional Revolutionary Party, and the Party of the Democratic Revolution are likely to put together an electoral coalition, much as they did in 2021, the Citizen Movement party will not join, splitting the opposition vote, becoming a spoiler, and possibly handing most of the governorships on the ballot to the president’s party coalition of MORENA, the Green Party, and the Workers Party.

The likely outcome is a year of substantive political and social turmoil, although the opposition appears willing to engage López Obrador in conversation to achieve basic accords for the country’s governability. Still, López Obrador is not one to make concessions and any agreement is unlikely.

Social Conflict

Because of López Obrador’s proclivity for calling out his critics in all social, economic, and political fields, the country is likely to see further social conflict — more so because the president, despite promises, has failed to respond to social demands for public safety and security, mobilization around justice issues — such as finding the tens of thousands of the disappeared — feminist demands, medical attention to chronic and serious diseases, and more recently demands from universities, students, and academics, all of whom the president has repeatedly criticized for their “aspirationist” goals. The year 2022 will see more social mobilization, to which the president and his allies will respond by further mobilizing their own advocates.

Moreover, given López Obrador’s fiscal restraint and severe cutbacks in public administration, the country’s infrastructure has deteriorated and government services have suffered. Public demands for attention to these issues will grow in 2022. In response, the president will find refuge in the military, as he has in the past. Suspecting corruption and incompetence in his administration, reinforced by his autocratic tendencies, the president has found it convenient to delegate to the military a number of public works construction projects, the provision of government services, security, and even public health activities. This will likely continue in the year 2022.

Regulatory Environment

Mexico’s regulatory environment will continue to experience high degrees of uncertainty. A key driver is the president’s slow cooptation, dismantling, or starvation of independent regulatory commissions involved with some sectors of the economy — such as energy, telecommunications, the environment, etc. Moreover, the president will continue using presidential executive actions or decrees, which he has found appealing due to his administration’s inability to act expeditiously on his projects and his impatience with permitting and other such administrative processes. The president will increase the use of his powers to push through his priorities, but he will face resistance as frustrated individuals, social groups, and businesses file for injunctions to prevent him from ruling by decree. Still, this dynamic will introduce uncertainty for investors and the entire business community.

Economic Performance

Mexico is unlikely to have better economic success in 2022. The political stability, regulatory certainty, and public safety and security conditions that businesses require will not reach levels that make most investors feel comfortable. Already, capital flight is accelerating. Foreign direct investment will likely not be enough to spur the rate of growth and overcome the expected continuation of capital flight in 2022. As such, through 2022, Mexico will continue to be at GDP levels below those of 2018. A full recovery is not likely until 2023 or beyond.

Employment will recover slowly and barely reach pre-pandemic levels by the end of 2022. Still, many Mexicans will be forced to leave the formal economy for the informal economy, with little possibility of finding full-time, well-paid employment in 2022. Furthermore, although the president has mandated a 27% increase in the minimum wage, inflation will erode some of the wage gains, and create further discontent.

Even so, the president is not likely to push for a stimulus package for 2022. The federal budget has already been approved and it contains major funding for the president’s infrastructure priorities, social spending in unconditional cash transfers, and increases in pensions, but lower investment in infrastructure and services for the population. The president is not likely to increase taxes in 2022, preferring to borrow in international markets. But he will maintain relative fiscal discipline. By the end of the year, however, lower economic growth, the long-term effects of the pandemic on employment, capital flight, and increased unproductive spending by the government will put additional pressure on fiscal policy.

Monetary policy is the great unknown. The president has withdrawn Arturo Herrera Gutierrez as his nominee for the Central Bank of Mexico (BANXICO), and designated a candidate considered unqualified, as she possesses little knowledge and experience in monetary policy and her greatest attribute is that she may allow the president to set monetary policy through her. That will complicate the dollar-peso exchange for the year, with greater volatility expected in the exchange rate.

Energy Policy

The president will continue his push to rescue the stumbling national oil company, PEMEX, and the national electric utility (CFE), favoring efforts to turn the energy sector into a monopoly, exclude private and foreign investment, and dismantle the ability of regulatory commissions to oversee the market. Still, Mexico will continue to depend on gas imports and will not be able to increase its oil production substantially. Its energy products and services will deteriorate through the year. Inefficiencies and distortions are likely to grow in the energy markets, as the president implements measures such as subsidies to gasoline prices to contain inflation and prevent anger in the general public. These subsidies will increase pressure on the president’s fiscal policy. And such distortions will be difficult to eliminate in the coming years.

Public Safety and Security

The year 2021 saw a stabilization in crime and violence levels, albeit at the highest level they have reached in decades. This is not due to a national strategy against organized crime, but to the president’s policy of appeasing organized crime. His policy of “abrazos, no balazos,” or “hugs, not bullets,” is not likely to pay off in lowering crime and violence. Instead, in 2022, organized criminals will conquer more territory, engage in more activities, and acquire greater fire power. They will be further emboldened in 2022 by the government’s unwillingness to face them down. This is the greatest challenge to Mexico’s future governability, but the López Obrador administration will not move to challenge the aggressiveness of criminals nor make any changes to his public safety and security policies in 2022. The result will be incidents of violence and crime throughout the country. The next president will face this gargantuan challenge.

Public Health and Management of COVID-19

Mexico mishandled the coronavirus pandemic. There were no specific strategies, and the government underplayed the dangerousness of the virus, deemphasized measures such as mask-wearing and social distancing, and deployed vaccination efforts late and unsystematically. It also dismantled or divested funding for the health care system. It continued to underestimate the number of infections (largely by limiting testing) and undercounting the number of deaths caused by COVID-19. The result has been an estimated half a million deaths, serious long COVID-19 effects, and deep economic impacts, largely because the president refused to implement a stimulus package to maintain economic activity and employment. Thus, 2022 will be a year of slow recovery. The country will stagger out of the pandemic, largely because more people will be vaccinated over time and most Mexicans will simply learn to live with the virus.

Conclusion

The year 2022 in Mexico will see many of the ongoing dynamics of 2021. The key differences will be an increase in political polarization and social conflict, growing centralization and arbitrariness in the regulatory environment at all levels, a slow economic recovery with increasing pressure on fiscal and monetary policy, a more regressive energy sector, a flattening of crime and violence at high levels with a strong consolidation of organized crime, and a continued but normalized health crisis.

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