Economics: Soft economic and fiscal results

MEXICO - Report 02 Mar 2020 by Mauricio González and Francisco González

The economic data released in February continued to reveal areas of increasing weakness, especially on the level of industrial output, which extended its downtrend with a 1.0% contraction as both construction and manufacturing activity slowed further. As a result of those trends, GDP fell a real 0.4% yoy in 4Q19. Meanwhile, gross fixed investment extended its streak of negative results through a tenth month in November 2019 by declining 2.8% below levels of a year earlier.

While the country’s current account deficit dropped last year from almost 2% of GDP to a mere 0.2%, that was achieved on the strength of a significant surplus during the fourth quarter of 2019 as the economic slowdown translated into a significant reduction in imports. Moreover, foreign direct investment in Mexico descended an annual 5.3% in 2019, marking the only time in decades in which the first full year of a presidential administration witnessed a slowing of FDI with the exception of the Zedillo administration, which was saddled with a major balance of payments and currency crisis that gave way to the Tequila Crisis.

There are reasons to expect Banco de México will implement further interest rate cuts for the remainder of the year following its decision in mid February to shed another quarter point of its target interbank lending rate. That easing policy has been facilitated by relatively benign inflation, but during the first half of February 2020, 12-month consumer inflation climbed to 3.52% due to continuing core price pressures.

There are concerns on multiple public finance fronts even after the government posted a positive primary balance for 2019, as tax revenues and oil revenues continue to fall, while the deteriorating operational and financial health of Pemex remains a source of risk to Mexico’s debt ratings. Moreover, had the government not opted to start drawing on Oil Revenue Stabilization Fund proceeds, it would have seen its targeted 1% primary surplus cut in half or it would have been forced to make even deeper spending cuts.

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