Economics: Headwinds Stiffen as Volatility Builds

MEXICO - Report 21 Jan 2016 by Mauricio Gonzalez and Ernesto Cervera

The first weeks of 2016 have been marked by a significant devaluation of the Mexican peso along with a similar erosion of value affecting most of the world’s emerging market currencies. In the retail market, the peso was selling Friday at 18.55 to the dollar, a development that alarmed Mexican authorities and rattled business leaders, who once again warned of the inflation implications of such a shift in the value of the currency.

A considerable share of foreign exchange pressures in Mexico clearly have derived from a new contraction in international oil prices, which in the case of Mexico’s export crude blend fell more than 10% in just two weeks to a new low of 20.70 dollars per barrel (dpb) last Friday. This additional price plunge will, without a doubt, have a substantial impact on Mexico’s public finances in 2016 as the hedges on Mexican crude the authorities acquired last year (at USD47.5 pb) do not cover all the country’s oil exports. So if officials expect to hold the public deficit to 3% of GDP they will have to engage in a new round of spending cuts.

In this week’s “Outlook” section, we provide a detailed analysis of the volatile environment that Mexico and the rest of the world are experiencing.

In other economic news, last week the authorities released disappointing industrial sector data for November as production grew a scant 0.1% above levels of a year earlier, a result considerably weaker than the 2.1% expansion recorded for the same month of 2014.

The ongoing contraction in extractive activities was the main source of weakness in Mexico’s industrial performance, although an unexpected drop in construction sector activity also pulled the headline rate lower. Moreover, the relatively lackluster pace of growth in factory output, the weightiest of all four industrial sectors, failed to cancel out the negative impact of the two aforementioned industries.

The mining sector once again failed to break out of its extended downtrend, which dates back to April 2014. In fact, the sector continues to experience significant setbacks even after having accumulated almost two years of sharp contractions. Output in extractive industries fell 4.3% year over year in November.

Construction activity unexpectedly fell (-1.2%) in November, the sector’s first outright contraction in 18 months.

The construction component most responsible for the decline was the segment of civil engineering or heavy construction projects, the sector’s second weightiest component, in which activity fell at a 12-month rate of 4.6%. The component of specialized construction works, the sector’s least weighty component, was off by 1.8%.

Manufacturing expanded at a 12-month rate of 1.8% in November, a result that failed to approach the 2.9% average expansion of the previous ten months, a period in which output grew some months at a rate of better than 4.0%.

A total of 644,446 formal sector jobs were filled through the twelve months of 2015, according to the Mexican Social Security Institute. The report marked a weakening of payroll growth in Mexico compared to the 714,526 formal sector jobs generated over the course of 2014 as the manufacturing and construction sectors considerably slowed their pace of hiring in the final months of 2015.

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