Other variables

Other Variables

            Luis Rubio

The problem with fires is that they can blow in any direction -and one can get burned. However, that seems to be the frame of mind of the government today. The presidential term advances within a global environment over which the president has no control, but in which things are brewing that can be propitious as well as devastating for the development of Mexico. Those other variables are critical but are not on the governmental radar.

Two external factors are especially relevant for Mexico because on them depend the economic stability, thus the solidity or weakness, of the social fabric. One of these is exports, the main engine of the economy, which are contingent upon the vitality and dynamism of our U.S. neighbors. The other is the U.S. monetary policy, from whose decisions derive the stability of the peso–dollar parity. No one in their right mind can sneer at those elements and, nonetheless, that is precisely what the Mexican government has been doing.

In terms of exports, where the automotive sector predominates, the government drives an energy policy that is directly lined up against the trends that the sector is undergoing. Let’s start with the obvious: it is estimated that in the year 2025, 20% of automobiles sold worldwide will be electric, a percentage that will rise to 40% for 2030 and to 100% for 2040. That is, the main engine of Mexico’s economy -the exportation of cars and car parts- will experience a radical transformation and, nevertheless, Mexico is not a part of this. The manufacturers of those vehicles are not investing in the production of electric vehicles in Mexico due to the uncertainty provoked by the electricity reform bill.

The bill entertains very clear political objectives, but its economic rationality is somewhat ludicrous, not to say perverse. Beyond the proposal of further centralizing and controlling power, the reform proposal would have two evident consequences: first, it would raise the cost of electric current because the production costs of the Mexican Federal Electricity Commission (CFE) are higher than those of the producers that the initiative purports to remove. The remaining consequence will be that it would diminish (or disappear) the generation of electricity by non-traditional means (solar, wind, etcetera), whose production has become an imperative for many companies. In a word, the electricity reform that has been put forward would do away with the goose that lays the golden eggs and that is the principal unitary driver of the economy. No sane person would act in such a way unless they were propelled by a suicidal dogma.

The matter of the exchange policy is more subtle and indirect but, in contrast with the previous example, one over which the Mexican government has no influence in the least. Except that the lack of influence is accompanied by the enormous impact that the decisions of the U.S. central bank exert on the stability of the Mexican peso. When interest rates in dollars are low, as has been the case during the last decade, the peso lives on the flows of foreign investment that profit from the differential between the rate in dollars and the rate in pesos. However, on raising the interest rate in dollars, the appeal of investing in pesos decreases because investors do not see the need to take risks when the dollar is yielding attractive returns. That is the very threshold Mexico finds itself in today.

The U.S. economy is going through an unusual situation: an accelerated growth in prices. Under normal circumstances, the Federal Reserve would raise interest rates in order to “cool down” the economy without causing a recession. Although the president of the Fed has voiced his opinion in that respect, the political debate has veered off in another direction, enlivened essentially by a clash of perceptions: some consider this a transitory phenomenon, the product of a disruption brought about by the pandemic on production and the supply chains, while others regard it as a structural phenomenon that should be cut back at the root to avoid later stagnation, like that which took place in the decade of the seventies. For the former the next step would be to introduce price controls; for the latter the response should be monetary in character (interest rates). What the central bank does will have repercussions directly on the stability of the Mexican foreign exchange.

The core point is that Mexico presently finds itself at a particularly sensitive moment, in the face of potential turbulence on the part of variables that could impact the country’s stability specifically at the moment in which the process of the presidential succession is being stoked. The automobile companies will act according to the way the potential electricity reform could impact them, while the Federal Reserve will do what is proper in its sphere of authority. Neither of the two will consider the impact that their decisions will have on Mexico.

What is indeed certain is that, in its doctrinaire eagerness to alter the existing regime in matters of electricity, the Mexican government is playing with fire in that it does not choose to understand the enormous destructive consequences that this would entail for the Mexican economy and for the stability of the country.