Can México’s sluggish growth turn the corner in 2015, or will it disappoint again

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  • #879

    Eduardo Garcia
    Moderator

    For the past two years, most economists have, in general, been optimistic about México’s growth. At least, they’ve been so at the beginning of each year.
    At the end of 2012, for example, most economists thought that while the economy would slow a bit from its 4% growth rate of the past three years, it would still manage to grow 3.5% in 2013, according to the central bank’s 2012 mid-december survey.

    The economy grew in the end less than half of what it was expected –1.4%, according to the latest revised figures from Mexico’s National Institute of Statistics and Geography (Inegi).

    For 2014, economists were again confident the country would bounce back from its doldrums and would grow 3.6%, an ambitious outlook considering a new tax reform that included new or higher taxes, which were bound to drain disposable income from consumers and families.

    Economists failed again in predicting Mexico’s growth rate. The economy probably ended up growing between 2.2 and 2.3% last year –another disappointment.

    For 2015, the expectations are again optimistic as economists are again forecasting that México will growth above 3% –3.5% to be precise.

    Really? After getting it wrong for two times in a row, can economists be on target this time or at least closer to their initial forecast?

    So far, the latest headlines seem to indicate that this year’s growth prospects will fail to materialize –once again.

    As oil prices have tumbled, losing more than half of their value, and as México’s peso has lost more than 10% against the dollar, some are thinking that it’s time again to go back to the drawing board and start cutting México’s growth predictions.

    The political turbulence the current administration is facing because of growing insecurity in the southern state of Guerrero and in the western state of Michoacán, as well as the influence-peddling scandals that have marred the Peña Nieto administration’s reputation are two other factors that have convinced some that it would be very hard for Mexico to achieve a 3.5% growth rate this year.

    Yet, for some there’s still hope that despite all odds, the economy will accelerate over last year’s performance. Some recent indicators, including job creation, car sales and exports, industrial production, construction activity and declining inflation, give hope to some that the politically adverse-environment that plagued México in the last quarter of 2014, will not derail the signs of recovery the country witnessed during those months.

    The results give hope to some that Mexico will achieve this year its fastest growth rate since 2012 –more so if the U.S., México’s largest trading partner, continues its expanding drive of the past nine months.

    Is that so? Will that be the case? Can the drop in lower oil prices be compensated by greater export activity generated by U.S. consumer demand? Will Mexican consumers feel hopeful about the future despite the insecurity and corruption scandals? Will oil companies still invest the 8.5 billion dollars in Mexico the government hopes for now that the energy industry has been opened to private capital?

    As the year begins, what’s your take on the Mexican economy for 2015 and why, or not, will it be able to grow at a faster pace than in the past two year?

    #883

    Jude Webber
    Participant

    Hard not to agree. While there have been some encouraging signs, such as consumer spending today, the outlook remains uncertain. When I saw the news last night that Shell, Premier Oil and Statoil had scrapped some of their international plans because of low oil prices, I felt you have to wonder how much appetite for investment in Mexican assets will be affected. I imagine it will be an upbeat official message of business as usual until the mid-term elections, before having to think about how much spending is going to have to be cut. Caution trumps optimism, for now, I fear…

    #887

    Eduardo Garcia
    Moderator

    Since my last posting on Mexico’s growth prospects, two research teams, one from Mexican bank, Banamex, and another from Morgan Stanley have issued interesting reports regarding the impact of lower oil prices on the Mexican economy.

    I think both documents can help assess better what’s at stake for Mexico regarding the collapse of oil prices.

    As a result, I’ve included both documents for those interested in assesing what Banamex and Morgan Stanley have to say regarding the implications for the Mexican economy of lower oil prices.

    México y los precios del petróleo: Impactos y Coberturas

    Mexio: Lower Oil’s Sliver Lining

    #897

    Pamela Starr
    Keymaster

    What might the bankers and economists who attended Davos this year be looking at to explain their confidence in the Mexican economy? Most banks and international financial institutions still expect Mexico to grow 3-3.5% this year. While the headline economic stories seem disconcerting – the collapse in oil prices, Europe in recession as on the precipice of deflation, a 10% drop in the peso, and weak public confidence in the Mexican government – a look beneath the surface helps explain this continuing optimism among international bankers.

    First on the oil front, collapsing oil prices will not impact Mexico’s trade or fiscal balance significantly during 2015. On the trade front, oil accounted for just 13% of Mexican exports in 2014 and the country continues to be a net importer of refined petroleum products, 60% of which is gasoline. The consequent hit to Mexico’s trade balance will be limited. On the fiscal side, the Mexican government does depend on transfers from Pemex to cover over a third of the federal budget, but the impact here will be mitigated by three things: the 56% of 2015 oil exports that Mexico hedged at an average price of $76.40, the country’s $33.6 billion oil stabilization fund, and the arbitrage gains from importing cheap gasoline and selling it at retail prices that remain high which creates a profit stream that will help sustain Pemex transfers to the government. The need for significant fiscal austerity that could undercut growth seems unlikely.

    Meanwhile, recovery in the US economy which absorbs about 80% of Mexican exports combined with a 10% decline in the value of the peso should help the export sector (and Mexico’s current account). At the same time, rising production costs in China has motivated an incipient process of near-shoring to Mexico that is likely to pick up speed in 2015 and a global liquidity surplus combined with Mexico’s macroeconomic stability and liquid capital markets should help direct investment to Mexico. And as the Morgan Stanley piece Eduardo posted last week notes, it is quite possible that reduced excitement with investing in Mexico’s petroleum resources caused by the collapse in oil prices could have the unintended positive impact of forcing the Mexican government to sweeten the investment pie by deepening transparency and leveling the playing field.

    That leaves the questions of security and the capacity of the Pena Nieto administration to deal with the “political turbulence” set off by the disappearance/murder of 43 students in Guerrero and conflict of interest scandals in Mexico City. To my mind, this is the greatest risk to sustained growth in 2014.

    The administration’s persistently clumsy response to these crises and their apparent inability to comprehend the nature of the challenge facing them is worrying. In the words of a “former senior official” famously quoted in the Economist last week, “They don’t get that they don’t get it”. And this is a recipe for trouble if not corrected quickly.

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