Economics: Yawning Financing Gap Alarming
Balance of payments data for the first half of the year and the General Economic Policy Criteria included in the government’s 2017 Economic Package reveal a risk factor for Mexico which, while not new, has grown in recent months: a double financing gap, or what economic theorists refer to as twin deficits (current account and public finance).
The Public Sector Borrowing Requirement (PSBR) will amount to 3.0% of GDP this year, according to the Ministry of Finance. At the same time, the current account deficit was 15.5 billion dollars in the first half of the year and is expected to end 2016 at 33.2 billion dollars. The current account’s steady erosion shows that the deficit in this account went from 1.3% of GDP in 2012 to 2.8% in 2015, and 3.1% in 2016.
In fact, the current account deficit exceeded the 11.08 billion dollar inflow of foreign direct investment to Mexico between January and June 2016. Moreover, capital flight totaled 11.37 billion dollars during that same six-month period, the greatest such outflow experienced in any similar period since the authorities began tracking such data in 1995.
In this context, the capital balance has taken its toll on the Mexican peso, which has depreciated by 14.4% in the year to date, and has weakened by 35% since 2015, one of the steepest depreciations in the emerging markets world.
In this week’s Outlook section, we analyze the risk factors arising from a deterioration of Mexico’s current account in a period marked by an erosion of public finance and international uncertainty.
In other economic news last week, it was reported that aggregate demand grew by only a seasonally adjusted 0.9% during the second quarter of this year. The main factors contributing to that restrained increase were a 1.9% increase in private consumption, at the same time as government consumption grew 1.8%. Nevertheless, gross fixed capital formation narrowed 0.5% during the quarter as public investment retreated 5.5% and private investment advanced 0.8%. Exports were down by 0.8%.
Another significant piece of economic data was the slowing of growth in factory payrolls. In the most recent report, payroll contractions compared to a year earlier were detected in the overwhelming majority of branches of manufacturing. Cases in point included industries related to the automotive sector such as computer and electronic accessories, and transportation equipment, in which payrolls slowed to 4.0% for the former and 3.9% for the latter. Those results pale compared to gains of 5.5% and 7.2%, respectively, in July 2015. Payroll growth rates also slowed at factories producing machinery and equipment, non apparel textile products, and plastics and rubber industries, just to cite a few of the most weighty examples.
Lastly, 12-month consumer inflation climbed to 2.88% during the first half of September 2016, the sharpest increase in seven months. As has been the case in recent months, goods inflation was the main source of upward pressure. Furthermore, the prices of fruits and vegetables continue to climb significantly and well above rates of the previous year. Another aggravating factor was the government’s decision to raise the price of regular (low octane) gasoline yet again.
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