How Bad Will It Get?
In this Business Forecast Report we take a closer look at Mexico’s economic outlook in light of the turmoil in the global financial markets, continuing decline in global commodity prices, and what now appears to be a severe economic downturn in the US. We also look at how the government of President Felipe Calderón is preparing to deal with what is becoming a bleaker economic outlook for 2009, although we remain relatively confident that economic growth will regain momentum over the next couple of years to 3.9% by 2011.
From a political perspective, we examine how the left-wing opposition Partido de la Revolución Democrática (PRD) appears to be declining in popularity, thanks largely to a resurgent Partido Revolucionario Institucional (PRI). With next July’s mid-term congressional fast approaching, we see a significant restructuring of congress as highly likely, and believe this could have important ramifications for BMI’s proprietary short-term political risk ratings for Mexico. With spiralling levels of violence showing no signs of abating in the near future, and the effects of a global credit crunch likely to hit Mexico, we believe security and the economy will be the key issues next July.
In a testimony to congress in September, Mexican Finance Minister Agustín Carstens admitted his concern about the recent performance of workers remittance inflows. He followed by stating that remittance incomes would probably fall by 7-8% in 2008 (equivalent to roughly US$2.5bn) as a direct result of the slowdown in US economic activity. We generally agree with Carstens’ concern about the negative impact of slower US growth on remittance flows. Indeed, in the first eight months of the year, remittance flows fell by 4.2% as a result of the poor performance of the US construction sector (the largest employer of Mexican overseas workers), which we see unlikely to improve at least until the latter stages of 2009.
In early October the government announced its revised budget for 2009, which was approved by the PRD as it promised a US$4.4bn boost to public spending. Part of this would be on a new oil refinery, something that the PRD’s previous presidential candidate, Andrés Manual López Obrador, proposed in his 2006 election campaign. While such a large increase in public spending, coming on top of an already ambitious infrastructure development plan, should help improve the country’s business environment, we are concerned at the pressure this will place on the fiscal coffers.
Post date: 2/20/2009