Wednesday, August 21, 2013

Sluggish Mexican economy worries foreign investment experts

"Economic growth has been failing in Mexico" - a Moody's spokesman today

*Updated Oct. 8*
Guadalajara -
Seven months ago Mexico's president and national bank chairman both boasted that the country was poised for 4% economic expansion in 2013, a level of growth which its big neighbor to the north may have a very hard time matching this year. But the rosy prognosis has proven dramatically over-optimistic, and it now appears unlikely that the country will achieve even half of that. Banixco raises storm flag warning on Mexican economy.

Yesterday the secretary of Mexico's Hacienda y Crédito Publico said he anticipates annual growth of just 1.8%. The agency is the nation's federal tax collection and budget planning office.

The Hacienda stressed that the far less than hoped for growth won't translate into federal spending cuts. It also said the outlook for economic expansion in the remaining months of the year is better than it was in the first half, although it offered no explanation to buttress that opinion.

Mexico's National Institute of Statistics, a federal monitoring agency, reported that the economy grew a mere 1% in the first trimester (January-March) of 2013, and 1.5% in the second (April-June).

In sharp contrast, Mexico's economy grew 4.2% in the second trimester of 2012.

Just three months ago the Hacienda warned that reduced government receipts occasioned by a deflating domestic economy would result in less public spending than that authorized by Mexico's congress for the current fiscal year. But yesterday the department reversed itself, and said no cuts were anticipated:

"Federal revenues are essentially in line with what we expected, so spending will continue at projected levels. With the information we have today, no fiscal adjustments are anticipated."

But in a radio interview Hacienda secretary Luis Videgaray (above) acknowledged that 1.8% growth is "far below what Mexico needs." He blamed the deflating economy in part on lower American demand for Mexican exports, and said the administration would try to jump start it by carrying out government spending projects already approved by congress. "Without sustained economic growth there will be no jobs, no way to fight poverty and no prosperity to share," added Videgarary.

Today Mauro Leos, Latin American director of Moody's Investor Service, said Mexico's chronically anemic expansion raises serious questions about the national economy and its capacity for growth, both in the long and mid terms.

"Economic growth is one of those things which has been failing in Mexico, measured against other similarly situated Latin American and Caribbean nations," Leos said today at a Moody's conference.

Over the last 12 years Mexico's economy has posted average annual growth of 2.5%. That's the lowest among Latin nations with equivalent national debt, noted Leos.

Moody's rates most Mexican federal and state bonds as Baa1, or lower medium grade. Bonds are issued by governmental entities to raise funds for public spending purposes, such as infrastructure improvement. They are debt instruments, which governments must repay with interest within a defined term. The more solvent and stable the borrowing entity, the lower the interest rate the bond will carry. Less stability, and therefore a theoretically higher risk of default on the obligation, translates into a higher rate of interest which the entity must offer in order to attract investors, especially foreign ones. That can cost a government dearly over time, as Greece, Spain and others have learned recently.

Although Baa1 bonds are not considered risky investments, they are far from prime. They are defined as instruments issued by an "obligor (business or government entity) which has ADEQUATE capacity to meet its financial commitments. But adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitments."

Sovereign debt - how much a nation's federal government collectively owes to all of its creditors - is also directly linked to the country's potential for economic expansion, according to economic experts, and Leos touched on that topic today. Such debt is often expressed as a percentage of gross domestic product (GDP, or PBT - producto bruto interno - in Mexico), the latter of which represents a nation's annual economic output of all goods and services.

In 2012, Mexico's sovereign debt was estimated at a very reasonable 35.4% of its GDP.

By comparison, as of Apr. 2, 2013 U.S. debt owed to domestic and foreign investors accounted for 75% of GDP. But when intragovernmental U.S. obligations were factored in - that is, money owed by one federal agency or department to another - aggregate public debt was well over 100% of annual GDP.* According to one source, "As of January 2013, $5.6 trillion or approximately 47% of U.S. debt held by the public was owned by foreign investors, the largest of which were the People's Republic of China and Japan, at just over $1.1 trillion each."

In 2009 two U.S. Ph.Ds who carefully studied the economic histories of many nations over an eight century period published a book which concluded that once a country's debt reaches 90% of GDP, growth slows noticeably. When the ratio reaches 100%, sluggishness becomes more pronounced. As it crosses the 100% "red alert" threshold, the situation worsens until the entire economic engine seizes up and most growth stops (At the edge of the precipice).

Although Mexico's national debt is well within manageable levels, the burgeoning debt of its 31 states and one federal district is a cause for major concern, according to many experts, and could hamper long term economic growth. Mexican state and local debt leap. Compounding that problem is the fact the federal revenue sharing funds to which the states are entitled will decline as the national economy contracts. Jalisco governor Aristóteles Sandoval said that his state is already feeling the pinch.

In remarks at the Moody's conference today Leos noted that president Enrique Peña Nieto's bold plan to open Pemex - Mexico's state oil monopoly since 1938 - to a degree of foreign participation may stimulate investment from abroad in other sectors of the national economy as well, thereby promoting expansion over the long term. The proposal, which requires a constitutional amendment, enjoys broad congressional support by legislators from both the center right National Action Party and the center left Institutional Revolutionary Party. Far left politicians are unified in their opposition to the measure.

*A note on GDPs. The 2012 gross domestic product of the United States was $15.653 trillion dollars, the world's largest. Mexico's was $1.758 trillion USD, in 11th place. Both are reported here, together with the GDPs of 180 other nations. Mexican telecommunications magnate Carlos Slim, the richest man in the world, has a fortune which is about 4.5% of his nation's entire annual output. That's why some argue that Mexico's economy must be democratized.

Aug. 26 - The U.S. will reach its congressionally authorized debt ceiling of $16.7 trillion in mid-October, the secretary of the treasurer announced today.

Aug. 31 - Bank of America Merrill Lynch: Mexico in huge economic hole; looming "risk of recession"
Sept. 18 - Mexico is in full recession, with major pension and social service funds "broke"
Oct. 8 - Wal-Mart sales in free fall a good barometer of a Mexican economy on the skids
Oct. 20 - Baja Santander pronóstico de crecimiento para México

Aug. 24 - Mexican unemployment stats paint a bleak picture for the most well educated
Aug. 23 - Dismissing the economic forecast, Mexico's Interjet places big order for European aircraft
Aug. 21 - Poor tourism prognosis concerns Puerto Vallarta official
July 2 - Peso, dollar remain volatile; Banixco has $169 billion USD banked abroad.

© MGRR 2013. All rights reserved. This article may be cited or briefly quoted with proper attribution or a hyperlink, but not reproduced without permission.

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