Risks Prompt Lower Growth Forecast

MEXICO - Report 02 Sep 2015 by Mauricio Gonzalez, Guillermo Valdes, Esteban Manteca and Ernesto Cervera

The slowdown of crude output, and loss of momentum in the construction sector, led to weak industrial activity data for June (when it was up just 1.4% y/y), amid general financial uncertainty. Industrial results plunged in Q2, to almost half their Q1 growth rate.

The peso has lost more than 25% of its value against the dollar since August 2014, and continues to depreciate. Reasons include expectations that peso interest rates will soon begin rising, in response to expectations of Fed tightening – which have affected the value of currencies globally —and more recently, by the strength of U.S. labor variables.

Now we’re lowering our 2015 forecasts, to 2.1% from 2.3%, in response to the range of risks to the Mexican economy. These include a potential Fed tightening, depressed oil prices, falling Mexican oil output, Chinese slowdown and its effect on Mexican manufacturing exports due to yuan depreciation, and the increasing weakness of both the peso and public finance.

President Enrique Peña is to deliver this third annual State of the Nation Report on September 2nd. But he hasn’t yet overcome the political crisis that erupted with the September 2014 massacre-disappearance of 43 students from a rural teachers college, or the subsequent conflict of interest scandals. The list of major government slipups and miscues has grown this year, most recently and famously drug kingpin Joaquín “El Chapo” Guzmán’s second escape from a Mexican maximum security prison in July. Matters have been further complicated by economic deterioration: amid peso devaluation, public finance requires deep spending cuts.

With Peña’s approval ratings at all-time lows, the president has tried to create a more favorable environment in which to lay out his vision for the country, and his policy proposals for the second half of his term. In addition to the administration’s long-expected exoneration of the first lady and minister of finance in the alleged conflict of interest cases, the president has announced some new administration bills and reshuffled his cabinet, though this latter move was viewed by some critics as little more than a game of political musical chairs. But the shakeup was significant in that it added at least two new names – Aurelio Nuño and José Antonio Meade — to those positions to become the ruling PRI’s next presidential nominee, now that the chances of early favorites Luis Videgaray and Miguel Ángel Osorio Chong have been weakened by unforeseen developments and policy missteps.

We’ll have to wait to hear the president’s speech before we can more clearly interpret this effort to re-launch his administration in this very complicated period, even as the government appears to have lost its bearings this year. The speech will gain greater importance if the president adopts a self-critical approach; otherwise, it’s hard to imagine how he can overcome the public’s sense of distrust and incredulity.

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