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Monday, January 19, 2015

Looming Promise, Perils and Pitfalls in Mexico's 2015 Economy

Frontera NorteSur

Depending on the source, predictions vary significantly for Mexico's economic performance this year. Backed by some international economic forecasters, the Peña Nieto administration foresees a buoyant year of higher growth, generous foreign investment, greater job creation, and lower prices for consumers.

 

On the other side of the coin, some economists warn of both market and structural weaknesses manifested by falling oil prices, peso devaluation, low wages, and laggard job growth. In different appearances since the beginning of the year, President Enrique Peña Nieto has emphasized the economy over the continuing political crisis arising from the mass killings and forced disappearances of students in the state of Guerrero last September.

 

Peña Nieto and his senior administration officials say the major developments that will get the economy pumping in 2015 include a government-mandated halt to the rise in regular gasoline prices of recent years, or "gasolinazos;" the elimination of long-distance charges for calls made in-country; reinvigorated housing construction programs; and business financing for entrepreneurs aged 18-30.

 

The administration plans on implementing special economic zones with tax incentives in the politically volatile states of Chiapas, Oaxaca and Guerrero; building new railroad infrastructure; and landing oodles of foreign investment in the energy sector, which is now open to corporate investors after Congressional approval of the reforms known as the Pact for Mexico. 

 

Additionally, Peña Nieto mentioned in a recent speech the Mexican government's giveaway of 10 million new television sets as part of the country's transition from analog to digital technology. "The initiative is one of the biggest efforts in the world to bring the technology into homes," Peña Nieto was quoted.

 

Several international economic institutions have given the Mexican economy an upbeat prognosis.  Though containing some words of caution over falling oil prices and political problems related to violence, the U.S.-based credit rating agency Standard and Poor's predicted a 3.2 percent growth rate for 2015, a much better performance than the 2.1 percent growth experienced in 2014 and the 1.4 percent racked up in 2013.

 

According to Standard and Poor's: "In our opinion, the decreased popularity of the government coming from (political crisis) could marginally affect its capacity to implement its economic agenda, but given that the majority of the important reforms have already been applied we do not expect it to become critical."

 

Headed by former Mexican official Jose Angel Gurria, a promoter of neoliberal economic reforms during the administration of President Ernesto Zedillo (1994-2000), the Organization for Economic Cooperation and Development likewise signaled the energy and other reforms as positive groundwork for achieving at least an extra 1.5 percent in annual growth during the next decade.

 

Joining the club of optimists [last] week, the World Bank projected 2015’s growth at 3.3 percent – less than the Peña Nieto administration's prediction of 3.7 percent but still above the numbers for the last two years. At the outset of the Peña Nieto administration, officials projected a 3.5 percent growth rate for 2013 and 3.9 percent for 2014, both of which were far off the mark. 

 

Other analysts have offered a more guarded or critical analysis of Mexico's economic prospects in 2015. In a December meeting, the central Bank of Mexico mulled over the impact of plunging international oil prices which, in the case of Mexico, saw the price of a barrel of crude plummet from $92.51 in December 2013 to $37.36 by mid- January 2015. 

 

Although the Mexican government has shielded the country (at least partially) through the 2015 budget year from the price plunge by shelling out $773 million for "put options" that guarantee a sales price of $79 per barrel for a portion of the national oil stock, the Bank of Mexico cautioned that, in the event of continued low prices, the bonanza of expected foreign investment in the energy sector won't materialize because the profit potential simply doesn't exist. 

 

Since many of Mexico's oil and gas reserves are located in hard-to-extract shale and deep water deposits, expensive technology will have to be utilized. 

 

"The lower oil prices could reduce the profitability of the projects that would have come from the energy reform, and with it, reduce the effects that this might have on (economic) activity," the Bank of Mexico stated. 

 

Further clouding the horizon for Mexico are growing predictions that the international price will crash to $20 per barrel of oil. In response, the Peña Nieto administration is singing a tune along the lines of the Bobby McFerrin song, “Don’t Worry, Be Happy.”

 

Though about one-third of Mexico's federal budget comes from oil sales, the administration maintains that recent tax hikes will compensate for the reduced petroleum revenues. At a recent seminar organized by the Autonomous Technological Institute, Economy Secretary Ildefonso Guajardo affirmed that the importance of oil as a generator of foreign exchange has decreased markedly, from 70 percent in previous years to 13 percent today. In this sense, Mexico's booming auto export industry helps fill the oil revenue gap.

 

Other jitters in the Mexican economy include the value of the peso to the dollar, which dropped 13 percent in value from January 2014 to January 2015, and a possible increase in U.S. interest rates. The higher rates could send foreign investors, who currently own 38 percent of Mexican treasury certificates and other government bonds, back across the border, according to Proceso magazine.  

 

Besides higher costs to consumers who purchase U.S. goods, the weakened peso means extra expenses in servicing a foreign debt that must be paid in dollars. Proceso tagged Mexico's external debt at $145.461 billion as of September 2014. 

 

Insecurity endures as another drag on the economy.  In a recent study, the National Institute of Statistics, Geography and Informatics (INEGI) found that one-third of Mexican businesses had suffered some kind of crime, usually robbery, within the past year.  

 

INEGI estimated the annual economic cost of crime in the neighborhood of $10 billion, or 0.66 percent of the Gross Domestic Product. A majority of the businesses surveyed (60 percent) rated crime as their biggest problem, followed by taxes (47 percent), and the anemic purchasing power of the public (42.2 percent). 

 

Low wages and inflation are persistent sore spots in the economy. Dr. Carlos Gauna, professor of economics at the University of Guadalajara branch in Puerto Vallarta, calculated that the purchasing power of the average Mexican consumer tumbled 9 percent during the first two years of the Peña Nieto administration, with the daily cost of the basic basket of goods leaping from 172 pesos to 193 pesos. 

 

Inflation (currently in the four percent range) is not spiraling, the economist said, but steady price hikes take their toll on a workforce that is not seeing commensurate wage increases. On the employment front, Gauna contended that Mexico must create one million new jobs every year but is effectively creating only 200,000 new jobs. "What's more, if you have the fortune of possessing a job, it buys you less all the time," he argued.  

 

Gauna's numbers differed with a January 15 statement by President Peña Nieto in Ciudad Juarez that cited 714,000 new jobs in 2014. 

 

"We aren't contracting and we aren't in a recession," Gauna said in his overall assessment of the state of the Mexican economy. "We don't have three trimesters without growth, which implies a recession, but we also are not growing above the expectations."

 

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Sources: Tribuna de la Bahia, January 13 and 14, 2015. Articles by Alan Yamil Hinojosa. CommonDreams/Oil Change International, January 14, 2015. Article by Andy Rowell. Proceso, January 4, 2015. Article by Carlos Acosta Cordova.  Reforma, January 5 and 6, 2015. Articles by Claudia Guerrero and editorial staff. Notimex, December 19, 2014; January 6, 9, 10, 15, 2015. Puerto Vallarta Tribune, December 19-25, 2014. La Jornada, December 13 and 14, 2014; January 14 and 15, 2015. Articles by Juan Carlos Miranda, Carlos Alonso Lopez, Susana Gonzalez, Israel Rodriguez, Enrique Mendez, and news agencies. 

 

Reprinted with authorization from Frontera NorteSur, a free, on-line, U.S.-Mexico border news source; translation FNS.

Frontera NorteSur (FNS)

Center for Latin American and Border Studies

New Mexico State University

Las Cruces, New Mexico

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