Mexico City.- The country’s economy has developed internal and external imbalances that increase its vulnerability and may create conditions for a sudden adjustment if not neutralized in time, Moody’s Analytics has warned.
Current imbalances have surpassed the level that caused the last crisis at the end of a six-year period in late 1994, although current conditions are different, said Alfredo Cotino, director of Latin America at Moody’s Corporation analysis unit.
Disequilibrium occurs when there is an imbalance between two variables that, away from their equilibrium point, alter the economic system.
The factors leading to this imbalance are: increased consumption that leads to excess domestic demand, excessive financial liquidity, the strength of the peso that in turn causes increased imports, Cotino detailed in an analysis on economic prospects for 2024. For Mexico.
He explained that in 2023, the economy performed at overheating speed as a result of continued acceleration of domestic exploitation. Therefore, economic growth in the year was higher than the estimated potential growth of 2.5 percent.
“As a result, the economy has developed growing internal imbalances that are expressed in excess internal demand,” he asserted in an analysis published on Thursday.
When the economy suffers from excess demand in the long run, the national product is not able to satisfy the internal demand, thus tending to contain both hyperinflation and external imbalances, he explained.
Therefore, he pointed out, it is not surprising that inflation is resisting a sharp decline and that imports are much higher than exports.
He says the strengthening of the peso has also played a relevant role in the growing external imbalance, which lowers import prices.
He highlighted that the effect of exchange rate appreciation contributes to the reduction of internal inflation, so it can be expected that inflation will continue its gradual decline due to the effect of the exchange rate and monetary restrictions, but at a higher cost of external imbalances..
However, he cautioned that the downside of this is that external imbalances increase the vulnerability of the economy and create a displacement effect on national output.
Coutiño warned that the extended fiscal program approved for 2024 could add more fuel to domestic demand and increase surplus demand with further consequences in widening external imbalances.
This could increase the vulnerability of the Mexican economy.
Therefore, economic, fiscal and monetary policy needs to redouble efforts to reduce the vulnerability of the economy and avoid the risk of a hasty economic adjustment, he said.