Mexico’s bright image as the golden child of Latin America is in danger of fading as growing public discontent mounts and some investors start getting nervous. “Patience is not unlimited,” said Roberto Sifon-Arevalo, Standard & Poor’s managing director for Latin America.
Mexican officials have repeatedly said that the structural reforms that were successfully approved by Congress will pave the way to stronger economic growth, but the performance has so far proved disappointing. The government has recently cut its official growth forecast to between 2.5% and 3%, as opposed to 3%-4% recently, after a 2.1% expansion last year.
“There was always an expectation that by the second half of this year you would be ready to start to see at least some movement and now all those numbers have been revised downwards,” said Sifon-Arevalo. Such comments indicate that the long consensus to support Mexico’s cautious policy may be starting to fade, although the dominant view is still positive.
But Mauro Leos, regional credit officer for Latin America at Moody’s, another credit rating agency, said he was optimistic on the outlook, rejecting the notion that Mexico was going through a low growth cycle. Leos has forecast that economic growth will reach 3%-4% from next year, in the second half of the presidential term of Enrique Peña Nieto. “A lot of demands have been placed on non-economic issues. The government has to rebalance its strategy, but it is really not low growth,” he said.
Reform agenda slowing
Meanwhile, Sifon-Arevalo has warned against policy complacency. “This is a big risk,” he said. “The biggest risk is underperforming with the reforms. This would have a pretty negative impact on the government image and on market confidence.” Beyond that the malaise has now gone far beyond economic circles.
“The bureaucracy is working slower and the private sector is just depressed. Reforms are done but there is no one to push the economy to grow at 3%,” said Joydeep Mukherji, Standard & Poor’s managing director for Latin America, who points to a paradox.
“Mexico has done all the most important structural reforms people were asking for. They have done everything, but the implementation has been slow and this is connected to the whole political environment in the country. The loss of morale in the country is having an impact. The animal spirit of investors has gone away. It also has an impact on public sector officials who seem to be more reluctant to sign anything, because of fear of allegation of corruption,” he said.
Meanwhile, the slump in oil prices has led Mexican officials to order budget cuts of around 0.7% of GDP at the beginning of the year, which in turn, may have a detrimental impact on economic activity. “When you start talking about cutting capital transfer to the states, it means less projects and ultimately less growth. In essence you are going into the third year [of low growth],” said Sifon-Arevalo.
Ramon Aracena, chief Latin America economist for the Institute of International Finance, has ruled out a repetition of the tequila crisis, mainly because Mexico now has a flexible exchange rate and because its fundamentals are much stronger than they used to be. “There is a difference between being exposed and being vulnerable to shocks. If you are strong and resilient, you can work through these difficulties without creating havoc in your economy,” he said.