“Particularly worrisome” is that this slowdown “has taken place in a context where the US economy is growing above potential.”
The bad omens are stacking up for Mexico’s faltering economy as both domestic consumption and investment dry up while the challenges facing the country’s heavily indebted state-owned oil giant, Pemex, continue to rise. That’s the broad conclusion in the minutes of the latest meeting of the Bank of Mexico’s governing board.
Mexico’s benchmark index, the BMV IPC, has fallen 15% in the last year. For the first time since December 2018, the Mexican peso is once again below the all-important psychological level of USD$0.05 (or 20.07 pesos to $1), after having fallen by 6% in the last month, due in part to the emerging market jitters set off by Argentina’s latest woes, which resulted in yet another selective default on its debt that markets expect to expand to a full default on its foreign-currency debt.
Then, of course, there’s Pemex, whose $100 billion of debt is perilously close to receiving a downgrade from investment-grade to junk from the second ratings agency. If that happens, the state-owned company would become the largest “fallen angel” in history, which will probably lead to the forced selling of more than $10 billion of its bonds as well as a possible downgrade of Mexico’s sovereign debt.
As if all that wasn’t enough, the economy has stopped growing, having registered a barely perceptible 0.1% second-quarter rise in real GDP, after shrinking 0.3% in the first quarter. Following in the footsteps of U.S. rating agencies, the IMF and a clutch of domestic and international banks, the Bank of Mexico — Banxico for short — sharply revised downward its 2019 GDP forecast for Mexico, from a range of 0.8%-1.8% to 0.2%-0.7%. It was the fifth time this year it had slashed its growth forecast.
Some board members described the recent slowdown as “greater than anticipated”. While global economic pressures are partly to blame — in particular the risks posed by the China-U.S. trade war, Brexit, a slowing European economy, and continued failure to ratify the United States-Mexico-Canada Agreement (USMCA) — what is “particularly worrisome”, said one board member, is the fact that this slowdown “has taken place in a context where the US economy (Mexico’s biggest trading partner) is growing above potential.”
Mexican exports continue to perform fairly strongly. But domestic consumption and investment are both sliding. According to central bank data, consumption growth has been declining for years, from 4.3% in 2016, to 3.1% in 2017 and 2.3% in 2018, but the trend appears to be intensifying. At last count, in May 2019, the annualized rate of growth was 0%. The consumption growth of durable goods is already in negative territory for this year, pointed out one board member, despite robust growth in both remittances — transfers of money by workers of Mexican descent mostly in the US but also other countries to individuals in Mexico — and wages.
Private investment, particularly in construction and in the purchase of imported machinery and equipment, is falling sharply…
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