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  November 24th, 2016 | Written by

Mexico’s Economy: More Difficult Times Ahead

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  • Global credit insurer Coface released an economic outlook for Mexico.
  • Public debt in Mexico rose to 42.3 percent in 2015, up from 38.3 percent in 2013.
  • Government proposes budget cut of $12.9 billion, 1.2 percent of GDP.
  • The sharp depreciation experienced by the Mexican peso this year has reduced consumer purchasing power.

The global credit insurer Coface released an economic outlook for Mexico recently, and it didn’t paint a pretty picture for most of the country’s sectors.

In the second quarter of 2016, seasonally adjusted activity in Mexico decelerated to 1.5 percent, down from the 2.5 percent year-on-year (YoY) reported in the previous period. Industry, which shrank by 1.5 percent in the second quarter compared to the first, was the main contributor to this weak result due to the fall in oil production and challenges faced by manufacturing and construction industries.

The services sector also slowed during the period, to a growth rate of 2.4 percent YoY, down from 3.4 percent for the first quarter 2016.

José Antonio Meade, Mexico’s newly appointed finance minister, presented a 2017 budget that signals the government’s intentions to step up austerity. The budget included a $12.9-billion cut in expenditure, 1.2 percent of GDP. This is well above the cuts for 2016 and 2015.

Most of the reductions will come from funding of the state-owned oil company PEMEX. “It appears that the government is shooting itself in the foot,” said the report, “as lower investment in the oil company will further reduce oil production, limiting future tax revenues.”

In addition to these budget cuts, the sharp depreciation experienced by the Mexican peso this year has reduced consumer purchasing power. In a comparison of 61 currencies, the Mexican peso reported the third largest negative variation during the period from January to September 2016— negative 12 percent YoY, behind only the British pound and the Argentinean peso.

The environment will remain challenging in the short-term, said the report, slowing momentum in sectors related to private consumption. Coface downgraded its risk assessment for Mexico’s retail and automotive sectors; commodity-dependent sectors remain at risk.

Automobile industry experiencing slow down. Between January and September 2016, the industry’s performance slowed to 0.9 percent, on a year-on-year basis. As the Mexican auto industry is highly export-oriented, this lackluster result is mainly due to lower exports, particularly weaker sales to the United States.

Agro/food risks mainly linked to agro activity. The segment remains at high risk due to several factors, including low international prices, currency depreciation impacting the costs of imported fertilizers, the sector’s longer terms of payment, the importance of good cash flow management for financing crops, and challenging weather conditions.

Chemical industry not yet benefiting from oil reforms. The positive effects of the landmark energy reforms approved in December 2013 have not yet materialized, as lower international oil prices have reduced the segment’s attraction for investors. The recent budget cuts, of $5.3 billion in funding for the country’s public oil company, will be a further factor in declining oil production.

Civil construction undermined by scarce public resources. Some infrastructure projects have been delayed or cancelled due to lower tax revenues from the oil industry. The Mexican Chamber of Construction Industry expects public investments in construction to be reduced by 30 percent in 2017.

Services growth expected to decelerate. The relatively good performance of the services sector is backed by positive income fundamentals. In the near future, this rhythm of expansion is expected to slow, as the population begins to more intensely feel the counter effects of the tightening monetary and fiscal cycle.

Pharmaceuticals activity supported by increasing life expectancy. The segment shows good long-term prospects, as the country has a population around 120 million inhabitants and life expectancy is rising. In the short-term, however, the sector will be impacted by cuts in the federal budget.

Retail—income fundamentals expected to deteriorate. After being impacted by the 2008-2009 economic crisis, the segment has since reported solid growth. In July 2016, sales showed an increase of 7.9 percent year-on-year. Nevertheless, growth should start to decelerate, as consumers begin to feel the effects of rising inflation and interest rates.

Steel—weak global and domestic scenario. Mexico’s steel production decreased by 0.3 percent in the first eight months of this year YoY. The environment will remain sensitive in the near future. From a global perspective, it would appear that China´s pledges to reduce its total capacity will take some time to materialize. Meanwhile, Mexico’s domestic market will continue to be partially undermined by the lackluster activity in construction.