On paper the economic outlook does not look too bad. Real annual GDP
growth in 2010 was at least 5% and the private sector is expecting another 3.5%
in 2011, even though the government hopes for 3.9% and JP Morgan is forecasting
4.5%. Bullishly, the economy created 732,000 (social security paying) new jobs
in 2010: the most it has managed for a decade. The problem is that when these
achievements are put into context they dwindle into insignificance. The recovery
in GDP comes after the 6.5% decline in 2009.
The sudden economic problem is inflation. The Banco de México reported that a
sudden gust of fresh food price rises in the second half of December 2010 pushed
the monthly consumer price index up to 0.5%. This pushed annual inflation in
2010 to 4.4%.
In the first half of January food and household-product prices rose even
faster. According to price watchers, a basket of 25 staple foods and household
products jumped 5.3% in the first fortnight of 2011. The biggest jump in prices
was onions, which surged 35%. Beans, another staple food for the poor, were up
29% in the first half of the month. What should be worrying policymakers is that
it is not just fresh food prices which are jumping: bleach prices were up 30%
and soap prices were up 18%. Year-on-year, the same basket of goods now costs
5.7% more.
Independent economists are now forecasting that inflation could easily top
5.5% in 2011, even if the peso remains strong against the US dollar.
The jump in inflation comes at an awkward time. Although the economy had a
better year in 2010 than it did in 2009 it is still far from being in robust
shape. Walmart de México, the country's biggest retailer, reported that in
December its sales were up 3.7% year-on-year in nominal terms. As inflation was
up 4.4% in 2010, Walmart's sales actually fell in real terms.
The weak sales figures have been franked by faltering consumer confidence. In
December the consumer confidence index fell for the second consecutive month.
What should be concerning policymakers is that in the five months from August
four saw a fall in consumer confidence.
Another bleak straw in the economic wind is industrial orders. These fell in
December after two months of rises.
These short term problems will complicate an already difficult economic and
political outlook. The country is gearing up for congressional and presidential
elections in 2012. The current government is weak: it declared war on organised
crime on taking office in 2006 and is clearly not winning. Longer term, even
orthodox economists are lamenting the record of the right wing Partido Acción
Nacional (PAN) governments, which have held presidential power since 2000.
Neither Vicente Fox nor the current president, Felipe Calderón Hinojosa, have
delivered the economic reforms they promised. To be fair, neither president had
a majority in congress. It is hard to see Calderón's successor emerging from the
elections of 2012 in a stronger position.
Economically, Mexico has major structural problems. Its productivity is
continuing to fall and its government is all but paralysed. One example of this
paralysis is the failure to even start work on the state oil firm Petróleos
Mexicanos (Pemex)'s controversial new refinery at Tula, Hidalgo. The government
and Pemex have been talking about the refinery for the past couple of years. The
opportunity cost (incurred by not building the refinery) is rising as Mexico's
appetite for refined products, of which it is a net importer, increases as its
economy recovers.
Although the job creation figure is heartening, it also points to quite a few
lay-offs in December, traditionally a poor month for job creation. In the first
11 months of 2010 the economy had created 962,000 new jobs. The actual outcome
of 732,000 new jobs is a bit better than the forecast made by both the labour
minister, Javier Lozano, and the finance minister, Ernesto Cordero, who said in
September 2010 that they expected 2010 to yield 700,000 (net) new jobs in
the formal sector of the economy. The outcome is also significantly better than
the forecast from the central bank which was for a net addition of between
600,000 and 650,000 new jobs in 2010. In the whole of 2009 only 82,900 net new
jobs were created. This was a result of the global economic crisis which led to
the loss of 701,000 jobs in the formal sector of the economy between November
2008 and May 2009.
Another structural problem is Pemex's dwindling oil production. In the first
11 months of 2010 the oil monopoly produced an average of 2.57m bpd. In the same
period of 2009 it produced 2.6m bpd but in 2005 Pemex produced 3.33m bpd. The
rationale for building the Tula refinery is underlined by the fact that imports
of refined products, petrochemicals and natural gas has increased from US$9.5bn
in 2005 to over US$19bn in 2010. Mexico currently imports 45% of the petrol and
diesel it consumes.
Even the impressive GDP growth figures for 2010 show that the economy is
starting to slowdown In the first nine months of the year the economy grew by
5.28%, year-on-year, according to figures from the Instituto Nacional de
Estadística y Geografía (Inegi). This represents quite a slowdown from the 7.6%
year-on-year rate of growth in the second quarter of 2010.
The IMF points out that Mexico will underperform the rest of Latin America in
2010 and 2011. In 2010, while the region grew by 5.7%, Mexico will manage 4.9%,
the IMF reckons. In 2011 Latin America will grow by 4% but Mexico will manage
only 3.5% according to the IMF. The latest economic forecasts from the UN's
Comisión Económica para América Latina (Cepal) are similar. Cepal, like the IMF,
is forecasting that the economy will grow only 3.5% in 2011, below the
government's forecast of 3.9% and below the region's overall growth of 4.2%,
which is slightly above the IMF's forecast for regional growth in 2011.
Although sales of new vehicles finally began to rise in the final part of
2010, they are still way below (20%) the level they reached in 2008. Mexicans
are the least confident of all in the region about the state of their
economy. According to the Latinobarómetro poll, only 8% of Mexicans believe that
the economy is in a good or very good situation. This compares with 38% of
Brazilians who believe that their economy is either good or very good.
The latest Latinobarómetro (2010) survey also shows that Mexico is the nation
where people are least satisfied with economic performance. Only 17% of Mexicans
are satisfied with general economic performance, the survey shows. This is
significantly lower than the percentages who say that they are satisfied in
Uruguay (54%), Chile (49%), Brazil (47%), Venezuela (38%), Panama (38%) and
Ecuador (37%).
Mexico is also the lagging nation in the region in satisfaction with
democracy. Only 27% of Mexicans are satisfied with their system as it is now,
below even Guatemala and Peru, both at 28%. This compares very unfavourably with
Uruguay, where 78% of those polled say that they are satisfied with their
democracy, and Costa Rica (61%).
FDI: A specialist private security firm, Grupo Multisistemas
de Seguridad Industrial (GMSI), claimed that in the first nine months of 2010
foreign direct investment (FDI) in Mexico's six northern border states fell by
78%, compared with the first nine months of 2008. GMSI reckons that because of
the poor security situation in the states of Chihuahua, Nuevo León, Sonora, Baja
California, Coahuila and Tamaulipas, foreign investors spent only US$874m in
these states compared with the US$3.93bn they invested in the same period of
2008. The 2010 figure is also down on the US$1.36bn invested in the first nine
months of 2009.
GMSI pointed out that U-Line has postponed a proposed US$40m investment in
warehouses in Nuevo León, while Biomex has mothballed a proposed US$100m ethanol
plant slated for Tamaulipas.
GMSI points out that the north is not the only
part of Mexico where investments have been cancelled or postponed because of the
authorities' apparent loss of control of the area. Michoacán has also seen a
significant drop in FDI.
Overall, GMSI reckons that the upsurge in violence
in Mexico in 2010 has cost the country US$4bn in FDI.
IMF support: On 10 January the IMF agreed to make its
biggest ever loan: the recipient is Mexico, which gets a two year standby loan
of US$72bn. The loan is designed to prevent the economy from running into a
balance of payments crisis before the next government takes office.
Currently, Mexico is in decent financial shape. Its central bank reserves
stand at a record US$116.86bn. They grew by 20% in 2010 and in the first week of
2011 they rose US$3.2bn as the central bank sold peso for dollars in an effort
to prevent the peso appreciating further. Mexico's reserves are substantially
lower, in GDP terms, than Brazil's which stand at 16% of GDP. Mexico's reserves
are equivalent to about 10% of GDP.
Investment returns: In 2010 the private sector pension
funds, the Administradoras de Fondos para el Retiro (Afores), delivered an
annual average return of 11.8%. This was slightly above the 11.2% nominal return
they delivered in 2009. The figures come from the Comisión Nacional del Sistema
de Ahorro para el Retiro (Consar).
The 2009 and 2010 figures are the highest since 2006. The 2010 would have
been even higher but for a poor performance by financial markets in November and
December. Excluding the final two months, the average return would have been
over 18%. Óscar Franco, executive president of the Asociación Mexicana de Afores
(Amafore), pointed out that since the creation of the Afores in 1997 the average
annual return has been 13.6% in nominal terms, or 6.6% in real terms. The best
performing Afore in 2010 was Invercap, which returned 17.5% nominally. The worst
was Inbursa, which delivered only 5.8%.
Remittances: In November 2010 the inflow of remittances was
up 8.5% year-on-year at US$1.62bn. For the first 11 months of 2010, however, the
inflow was down 0.56% year-on-year at US$19.5bn. The private sector forecast for
December is for an inflow of US$1.62bn, which would produce a total inflow for
2010 of US$21.13bn, which would be down marginally (US$50m) on 2009's
US$21.18bn. More importantly, the 2010 figure would be 16% down on the 2008
inflow.
In peso terms, the inflow of remittances is even worse because the peso has
appreciated against the dollar. In November 2010 the peso climbed 7% against the
dollar. In 2011 the private sector hopes that remittances will increase by
about US$1.2bn, to about US$22.5bn. The most recent economic figures from the
US, however, are not that encouraging. Employment in the US is still not
improving. Unemployment among Hispanics is about 25% higher than the national
unemployment rate of 9.6%.
- Another worrying indicator is that the number of remittances is still
falling, year-on-year. This suggests that the better-off remitters are sending
more cash home but the poorer remitters are sending nothing
back.
