Mexico’s economy was supposed to soar, but it’s starting to flop
MEXICO CITY: Largely lost amid the frantic scramble after drug lord Chapo Guzman’s dramatic escape, one of the biggest leaps of faith for the Mexican economy landed with a flop.
At the first auction last month to sell the rights to drill for oil in Mexico — as the country opens its oil industry to foreign investment for the first time in eight decades — the government sold just two of its 14 blocks.
The disappointing showing for President Enrique Peña Nieto’s signature economic reform prompted the government this week to modify the terms of the contracts for next month’s auction, and added to what has been a noticeable string of bad news for Latin America’s secondlargest economy.
Mexico has been held up as one of the economic bright spots among emerging market economies, as Peña Nieto’s government has pushed through constitutional reforms aimed at making major industries such as oil and telecommunications more competitive.
But in recent months, Mexican newspapers have kept running banner headlines of economic gloom: The value of the peso has plummeted to record lows against the dollar, growth rates have shrunk to dwarfish size, and the only things that seem to be getting bigger are the poverty rate and the gap between rich and poor.
“With all this financial volatility we have seen with the peso, the failure of the round- one (oil) contracts and low growth, the economy continues to suffer from the chronic anemia of the past,” said Alfredo Coutiño, director for Latin America at Moody’s Analytics.
He added: “I do not see Mexico growing as the government expected at the beginning of this administration.”
Peña Nieto’s strategists had predicted that the structural reforms in the oil and telecom industries would produce growth rates of five to six per cent, but expectations keep dropping. While preparing this year’s budget, the government predicted growth rates of 3.7 per cent — while so far this year growth has hobbled along at 1.6 per cent.
That has taken a political toll. A poll from last Friday in the Reforma newspaper found Peña Nieto’s approval rating had fallen to 34 per cent, down from 39 per cent in March, reaching the lowest point since he took office in December of 2012.
( It didn’t help morale that Guzman, the world’s most notorious drug lord, was able to tunnel out of a maximum security prison.)
“We have an economy that practically has not grown in two and a half years,” said Jonathan Heath, an economics professor at the Metropolitan Autonomous University in Mexico City. “And that has bothered a lot of people, because the government promised that we were going to grow.” Economists say that part of the drag on the economy has been the low world price for oil, which has sapped revenue for the oil-producing country and dampened the initial enthusiasm from investors that they could reap big rewards by drilling in newly accessible waters of the Gulf of Mexico.
That has made for a sluggish start to the historic opening of the industry, which the government touted as a saving grace. While reforms may have contributed to lower electricity and telecom prices, and kept inflation low, their other growth-producing benefits have yet to materialise.
“To think that oil reform was the great solution to this country, that was wrong,” said Gerardo Esquivel, an economics professor at the National Autonomous University of Mexico. “It’s a sector that employs less than one per cent of Mexican workers.”
The peso has also been troubling. Mexico is not alone with its currency problems. World economic uncertainty, notably exemplified by the crisis in Greece, has boosted the US dollar against many emerging market currencies.