| | |  Business News | August 2009 
Mexico: A Glimmer of Good News in a Gloomy Economy
 Geri Smith - BusinessWeek
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August 17, 2009
 |  | The country is expected to turn in the worst economic performance of any major Latin American nation this year. |  | | |
Mexico's economic woes are widespread, but there are early signs of a possible recovery, including the opening of a new GM plant.
It was a rare bit of good news for Mexican President Felipe Calderón. On Aug. 11 he inaugurated a new, $300 million General Motors (GM) transmission plant in San Luis Potosí that will provide 350 much needed jobs in a country whose economy is expected to shrink nearly 8% this year - the worst decline since the 1930s. "The automotive sector is a fundamental pillar of progress and development," Calderón said at the plant opening. But, he added, "paradoxically, this perhaps has been one of the reasons that the global economic crisis has had such a big impact in Mexico."
The country is expected to turn in the worst economic performance of any major Latin American nation this year. That's largely because Mexico sends more than 80% of its exports to the U.S., where demand has collapsed. Detroit's woes have hit Mexico especially hard, as auto parts manufacturing and automobile assembly are the country's most important industrial sector, employing nearly 1 million people and accounting for $45 billion, or 21%, of the country's exports. Three-fourths of Mexico's auto production is exported to the U.S., and shipments were down 43% through June. Most automakers with operations in Mexico have cut shifts and furloughed workers for weeks at a time while waiting for a revival of U.S. demand.
And it's not the only industry that's hurting: Mexico's industrial production dropped 10.7% in the first semester, with manufacturing taking a 15.1% hit. Since December nearly 700,000 people have lost their jobs, but independent economist Rogelio Ramírez de la O says that number sharply understates true unemployment, as hundreds of thousands of people who labor in the informal economy also have been idled. "I don't see how anything less than a very brisk U.S. economic recovery will turn things around in Mexico," he says.
Falling Remittances
But Mexico's troubles don't stop there: Remittances - cash transfers sent home by millions of Mexicans working in the U.S. - are Mexico's biggest source of foreign exchange after oil exports. They fell 11% in the first five months of the year, to $9.2 billion. Many migrant workers have lost their jobs in the construction and hospitality industries and have sent less money home to their families in Mexico, where poverty is on the rise.
Finance Secretary Agustin Carstens told the Mexican Senate on Aug. 11 that Mexico faces the worst "fiscal shock" in 30 years because of declining oil production. That, he said, costs the country around $23 billion a year in lost revenue. Oil production declined 7.3% in the first half of the year, due to depletion of the country's main oil field. Petróleos Mexicanos (Pemex), the state-owned oil monopoly, says it expects to produce 2.65 million barrels of oil per day this year, down from an earlier target of 2.8 million. That will hit public finances hard because taxes on oil last year accounted for 38% of the government's revenues. Falling corporate earnings are also hurting tax revenues, which are down some $2 billion this year.
The Calderón Administration will soon be submitting the 2010 budget to Congress. There's also a proposal aimed at helping boost tax receipts, which equal just 11% of gross domestic product - one of the lowest tax-collection rates in the hemisphere. The country is likely to post a budget deficit of 3% of GDP next year.
The revenue shortfall makes it difficult for the government to deliver the counter-cyclical spending it promised to boost the economy: Carstens recently announced a 17% cut in budgeted spending, which could lead to delays in key job-producing infrastructure projects. Unlike Brazil, where a fiscal stimulus has reaped results because state-owned enterprises account for around half of the economy and government development banks account for nearly one-third of credit, in Mexico the government makes up just over 20% of the economy and state development banks control only 5% of credit, JPMorgan Chase (JPM) estimates, which leaves public officials with fewer available instruments for stimulus.
Tourism Trouble
Mexico has been hit this year by other bad news that has buffeted the economy. The outbreak of the H1N1 virus, or swine flu, in April forced many businesses to shut down for several weeks, throwing 111,000 people out of work and trimming GDP growth for the year by nearly a third of a percentage point, the government says. Tourist destinations that were hard hit by that health scare are still depressed because fewer American and Canadian tourists are taking international vacations. And news reports of thousands of deaths resulting from the government's crackdown on drug-trafficking cartels don't help Mexico's image much, either. "It's been a perfect storm - all the things that could go wrong have gone wrong," says Ramírez de la O.
Still, there could be some signs of an incipient recovery. Some 16,000 jobs were created in July, and although many are temporary, it is an indication that some companies are expecting an uptick in orders as the U.S. economy slowly emerges from the crisis, says Alfredo E. Thorne, chief economist in Mexico for JP Morgan. "In the same way that Mexico's economy dropped sharply in the first half, it could grow well in the second half," Thorne says. He expects a sharp uptick in the third quarter and recently revised his 2010 economic growth estimate from 3.8% to 5%. That is due in part to increased export competitiveness thanks to the weakened peso, which has fallen 27% over the past year.
The economic contraction this year is greater even than the drop suffered in 1995. That year, Mexico shrank 6.2% after a disastrous peso devaluation threw the economy into chaos, sparked triple-digit inflation, and depleted the central bank's reserves. At the time, Mexico was saddled with huge amounts of short-term, dollar-denominated debt and had a fixed exchange rate. Today, the country's public debt is much smaller as a share of GDP, its repayment profile is much longer term, and the peso floats freely. That helps explain why Mexico, although hurting, appears to be fairly calm. "The series of shocks Mexico has suffered this year would have generated an incredible crisis at any other time in the country's history," says Thorne. "Fortunately, the country's fundamentals are much better now."
In fact, Moody's (MCO), the ratings agency, on Aug. 5 reaffirmed its "stable" outlook for Mexico's sovereign debt investment-grade rating, noting that its economic fundamentals were sound. But the agency said Mexico faces a medium-term growth challenge, noting the country has averaged growth of just 3% a year over the past decade.
That's why Calderón must have been pleased to have some good news to announce at the GM factory opening. GM, which is mired in financial difficulties in the U.S., has made a big bet on its efficient Mexican plants, investing $3.6 billion over the past four years and planning another $1.2 billion through 2011, the Economy Secretariat says. GM employs more than 13,000 people in Mexico. Grace Lieblein, the president of General Motors de México, said that GM had planted "deep roots" during 74 years of operating in Mexico and had managed to complete the new transmissions plant "in spite of the [adverse] situation of the world economy."
Smith is BusinessWeek's Mexico bureau chief. |
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