Mexico & Nafta - January 2009 (ISSN 1741-444X)

On 7 January President Felipe Calderón Hinojosa announced a M$60bn (US$4.4bn) economic stimulus package. The key elements in the package are a cut in the price of cooking gas and a freezing of petrol prices. The package also contains measures aimed at preserving jobs.

The finance ministry claims that the package, formally known as the Acuerdo Nacional en Favor de la Economí­a Familiar y el Empleo, will boost GDP by about 1% (or M$120bn). The main elements are the freezing of petrol prices and the 10% cut in cooking gas prices. These moves will inject M$45.4bn into consumers' pockets, according to the finance ministry.

The bulk of the money for the package is coming from the M$100bn windfall produced in 2008 by higher-than-budgeted oil prices. The package has been endorsed (grudgingly) by the business sector, most trade unions and local governments.

The finance ministry admits that the best the economy can hope for in 2009 is annual GDP growth of 0.2%-0.3%. Most independent economists say that, in effect, the package may stop the economy from plunging into recession. Macro-economists sniff that spending so much money for so paltry a result is almost counterproductive.

Some tax economists argue that the government's switch from a conventional income tax (ISR) to the new Impuesto Empresarial a Tasa Unica (Ietu, which came into force in 2008), which is calculated more on sales than profits, will have a depressing effect on business.

The Ietu was initially set at 16.5% (in 2008) and was due to rise to 17% in 2009 and 17.5% thereafter. The finance minister, Agustí­n Carstens, argued that the government would be wrong to cut the Ietu, given that Mexico's tax take is already low as a percentage of GDP. (Stripping out oil revenues, which account for almost 40% of the government's fiscal income, Mexico's tax take is barely in double digits as a percentage of GDP).

The key element in the package is a freezing of petrol prices. Mexico's petrol prices have been rising because of the weakness of the peso against the dollar: Petrol in Mexico retails at the equivalent of US$2.66 a gallon. In the US, it retails at around US$1.75 a gallon.

Mexico imports most of the fuel it uses, while exporting lower-value crude oil. Mexicans grumble that they had to pay more for fuel when oil prices were rising (in 2007 and the first half of 2008), but saw no relief when oil prices halved in the second half of 2008. This was because the peso promptly started to slide against the US dollar.

Altogether, the package has 25 elements. Besides the moves to reduce energy costs, the government is offering companies support to avoid redundancies. The plan envisages a fund of M$2bn to help companies retain staff they would otherwise sack because of the effects of the global economic crisis and another M$2.2bn to support companies taking on temporary workers.

The employers organisation argues that the package could have been better and clearer. Ricardo González Sada, the president of the Confederación Patronal de la República Mexicana (COPARMEX), said that the big omission was the absence of a fiscal stimulus, as has been introduced by the US, China, Japan and Spain. He noted that even the IMF is recommending that governments throw a minimum of 2% of GDP into the economy. He pointed out that even the government itself admits that its package will not stimulate the economy by more than 1.4% of GDP.

Sada argues that the government should do more to prevent the Ietu deterring business investment. He suggested that it should only levy the Ietu after investment, wages and interest payments have been made.

The central bank (Banco de México) is forecasting that real annual growth this year will be between 0.5% and 1.5%, as against a probable 2% in 2008. Most independent economists think that that the bank is erring on the side of optimism. The current consensus amongst independent economists is that the economy will actually contract by between 1% and 2% in 2009.

Mexican economists warn that the end result could be even worse. They claim that the US has actually done very little, except make proposals (and cut interest rates) since the scale of the crisis became apparent in October 2008. On 8 January Carstens admitted that the economy would not grow at all in 2009. The government had already cut its GDP growth forecast from 3% when the budget was originally drafted in September to 1.8% by the time congress approved it in late October.

Economic confidence in Mexico is plummeting as the effects of the US economic crisis start to bite. On 8 January the national statistics agency, Inegi, and the Banco de México published the consumer confidence index for December: the index stood at 84.1 (100 was the level of consumer confidence in 2003), a staggering 20.4 points down on the December 2007 level.

The main reason for the plummet in consumer confidence is the outlook for jobs. In December, according to the national social security agency, the IMSS, the number of people working in the formal (social security paying) economy dropped by 327,136.  This meant that there was a net loss of 29,589 formal jobs in calendar 2008 as a whole.

This reversed Mexico's previously decent employment data. While the US lost 553,000 jobs in November 2008, Mexico managed to create 375,000 in the first 11 months of 2008. There was some evidence that the economy may have bottomed in November. Usually November is a banner month for job creation as the Christmas rush starts: in November 2008, however, only 38,000 jobs were created. In April 2008, 80,000 new jobs were created. The Asociación Mexicana en Dirección de Recursos Humanos fears that Mexico will only create between 200,000 and 250,000 jobs in 2009. Mexico currently has 1.98m unemployed people, or 4.2% of the workforce.

Other depressing data comes from the Instituto Mexicano de Ejecutivos de Finanzas (Imef) on the state of Mexico's manufacturing sector. The Imef's manufacturing index tumbled by almost five percentage points between October and November 2008. The manufacturing index stood at 43.6 in December, the lowest level since the Imef launched the index in 2004. The only encouraging point is that the index fell by only one percentage point between November and December. However, the December 2008 level was 4.7 points below the December 2007 level. The Imef points out, moreover, that the rolling trend (over the past four months) indicates a further contraction in manufacturing moving forward. According to the Imef, its trend indicator has been pointing downwards since July 2008.

The Imef reported that Mexico's manufacturing sector was being badly affected by events in the US. It believes that the US is now facing its worst economic crisis since 1929. On 3 December the US Federal Reserve Board published its Beige Book which showed that the economy had deteriorated significantly in October. The Fed said that inflationary pressures had dissipated and labour markets had weakened.

The Organization of Economic Cooperation and Development (OECD) was the first international body to turn bearish on Mexico. It has been forecasting growth of just 0.4% in 2009 for the past three months.

The big worry in Mexico is that the OECD may still be too optimistic. Although the OECD is forecasting that the US recession will be long, it estimated that US unemployment rate at the end of 2009 would be 7.3%. Yet after the OECD made that forecast, the US published some ghastly unemployment figures for December 2008 which put the rate already at 7.2%.  US unemployment in October 2008 was 6.5%. Even the big bears of the US economy had not expected the US to lose so many jobs so quickly: few of them expected US unemployment to get much above 8.5% in 2009.

What is not clear is what will happen to unemployment in Mexico. In 2006, for example, the economy grew by 4.9% and unemployment was 3.2%. Currently, (October) unemployment is 4.11%, up from 3.9% in October 2007.

The big question for Mexican policymakers is whether the recession in the US will prompt Mexican migrants who have been working in the US to return home. So far this has not happened, but some immigration watchers claim that there are ominous signs.

If there is a flood of migrants back from the US to Mexico, pressure on schools, hospitals and the labour market will increase. Furthermore, as the government is unlikely to have the resources to respond to the increased demands made on it, social unrest may also be a risk. 

Besides evaporating consumer confidence, the Calderón government is also facing rising inflation. In December, consumer prices rose 0.69% on a monthly basis, bringing the annual inflation rate to 6.53%, the highest in eight years. In 2007 the annual inflation rate was 3.76%.

Tequila: Tequila production in Mexico increased 10% in 2008, to reach a record volume of 312m litres. Meanwhile tequila exports grew 1.7% in 2008.

The motor industry: The motor industry had a surprisingly decent 2008. Production was up 4% annually (at 2.102m vehicles), and exports rose 3% (at 1.661m vehicles). The only problem is that domestic sales, which include imports, fell 6.8% to 1.025m vehicles.

There must be some doubt that the decent performance will carry on into 2009. In December, production was down 3.5% year-on-year and exports crashed by 10%. Even worse, sales of new cars in the domestic market fell by 19.8%, according to the Asociación Mexicana de la Industria de Automotriz.

The motor industry is unhappy at the economy ministry's decree, issued on Christmas Eve, which allows any vehicle over 10 years old to be imported, free of tariffs, from the US or Canada, provided it has not been stolen and has a certificate from its manufacturer proving that it was built in either the US or Canada. The only sop to the new car industry is the provision that a Mexican can import only one of these used cars every year. Used cars which are less than 10 years old have to pay a 10% tariff, as they have done since 2005. These vehicles are known as autos chocolates. In April 2008 the government banned the importation of all vehicles over 10 years old.

Oil prices: The government can still afford to ignore the slide in oil prices thanks to its astute deal in July, at the top of the market, to fix the export price for 66% of its exports at US$70 a barrel for 2009. On 12 January, the price of the Latin American benchmark oil basket, West Texas Intermediate (WTI), fell by 8% in a day to US$37.6 a barrel.

• Reserves Surprise
  The US Energy Department is reporting that its reserves of crude oil, natural gas and petrol are rising. Traders had not expected this and thus are pulling back from buying because if reserves are rising final demand from big consumers, such as China, must be weakening.

• US Budget Gap
  Based on US congress figures, the deficit for the 2009 fiscal year (1 October 2008- 30 September 2009) will be US$1.186 trillion. This is equivalent of 8.3% of GDP. Most countries have problems financing fiscal deficits above 4% of GDP. With such a deficit it is hard to see the US dollar remaining so strong against the peso - the Mexican deficit is negligible in GDP terms.

• Crude output down
  Mexico's crude oil output in the first 11 months of 2008 was 2.8m bpd, down 9.3% on the same period of 2007. Exports were down by 17% at 1.4m bpd. Export receipts rose 22% annually in the first 11 months of 2008 to reach US$42bn. The average per barrel price was US$89.