Pessimism Pervades Mexico as Economic Promises Fall Short

02mexico-web1-master675 MEXICO CITY — Jesús Rascón is the sort of success story that was supposed to epitomize “Mexico’s moment.” The plastics company he founded 13 years ago now employs 350 people in two factories. He sells parts to global companies like Volkswagen and Whirlpool. Even the slide in the value of the Mexican peso this year works in his favor because it makes his products cheaper overseas. Then why is he feeling so glum about Mexico’s economy? In a word: poverty. “Unfortunately the problem in Mexico is the wage rate, which is enough only to survive,” said Mr. Rascón, 48. Unless people have money to spend, he added, the companies that sell to them will never be able to expand the way his has. Such economic pessimism is pervasive across much of the country as President Enrique Peña Nieto prepares to reboot his presidency midway through his six-year term. Over the past year, as his administration’s credibility has tumbled in the face of corruption scandals and skepticism over its handling of the drug war, the president could still point to the package of economic changes that were sold as “Mexico’s moment” and promise that better times were around the corner. In the days leading up to his state of the nation speech on Wednesday, his administration has blitzed news media outlets with ads extolling the changes, which include rules to rein in powerful private telecommunications companies and an end to state control of the energy industry. The campaign repeats the pledge that investment and jobs are coming. But that story is beginning to look thin. 02mexico-web2-articleLarge Growth has been slower under Mr. Peña Nieto’s presidency than the annual 2.3 percent average in the two decades before he took office. In the last couple of weeks, both the central bank and the Finance Ministry have reduced their forecasts, suggesting that growth in 2015 may not reach that figure either. Salaries are stagnant, while recent studies show that inequality and poverty have increased over the past few years. Now, just when Mexico might have begun to see the first concrete benefits of the economic revisions, the economy is being pummeled by forces beyond the government’s control as global financial uncertainty mounts. The peak of the wave of constitutional changes that Mr. Peña Nieto maneuvered through a divided Congress in his first three years was opening the oil, gas and electricity industry to private investment, reversing the nationalization of the country’s oil industry 75 years ago. The timing could not have been worse. The collapse in oil prices all but halted the predicted rush by international oil companies into Mexico and will force the government, which relies on oil revenue to fund at least a third of its spending, to make significant cuts in social and infrastructure programs next year. The first auction for offshore oil exploration blocks in July drew so few bids that only two of the 14 on offer were awarded. Regulators have relaxed the conditions for coming bids, but the billions in investment that the government promised seem even further off. “Energy reforms are going to kick in some time in the future,” said Gabriel Casillas, chief economist at Banorte Financial Group, a large Mexican bank. “It’s going to take longer, 15 years, not by 2017 or 2018 as we thought.” In addition, the peso’s slide over the past year — along with the fall of currencies in other emerging markets — has raised the price of imports from the United States about 30 percent. That upends business investment plans and makes consumers nervous about big purchases. There are bright spots. Prudent economic management over the years has kept inflation under control and debt in check. About $20 billion in foreign investment has poured into the Mexican auto industry over the past six years to take advantage of Mexico’s proximity to the United States, its trade agreements and its skilled labor force. The results, though, are pockets of success in the highly efficient export sector that have failed to reach those on lower rungs of the economic ladder. “These policies have delivered stability, they haven’t delivered growth,” said Joydeep Mukherji, a managing director at Standard & Poor’s who follows Mexico closely. “There is a general negativeness in the air for many, many reasons,” Mr. Mukherji added. “That’s the hardest thing to turn around because you have to boost the confidence of investors and consumers. It requires political leadership and a different set of skills than passing a law.” There are other problems that weigh on the economy. Citing measurements from Mexico’s national statistics institute, Alonso Cervera, the chief Latin America economist at Credit Suisse, estimated that crime cuts a full percentage point off Mexican growth. “The economic reforms were very powerful and very forceful,” Mr. Cervera said. “I would have liked to see the same forcefulness on judicial reform. Crime and corruption have to be punished.” Business leaders argue that preaching patience is no longer enough. Along with opening up the energy sector, the economic changes closed tax loopholes, gave new powers to antitrust regulators, set up special rules to weaken telecommunications monopolies, encouraged banks to lend to small businesses, and gave employers new flexibility to hire and fire workers. But businesses argue that the economy now needs incentives for investment and job creation. Analysts argue that Mr. Peña Nieto’s government failed to invest during his first two years in office — when high oil prices gave finance officials much more room to maneuver than they have now — and lost a valuable opportunity. “Instead of building a bridge, they put money in accounts,” said Mr. Casillas of Banorte. “They earmarked money, but it was never used.” Others say the main diagnosis of Mexico’s ailment was wrong. “The reforms were oversold,” said Gerardo Esquivel, an economist at the Colegio de México and the author of a recent study for Oxfam that found that the country’s already vast inequality was growing. The government thought “that the energy issue was the solution to the country’s problems,” he said. “All sectors need to grow. It won’t drag up the rest of the economy.” The government points to an increase of 1.4 million workers during the last two years who are affiliated with Mexico’s Social Security Institute, a measure of formal employment and an indicator of success. But 60 percent of the population still works in the informal sector in jobs such as taxi drivers or street vendors, most of them barely scraping by. Almost 42 percent of workers cannot afford to meet their basic needs with their salary alone, according to one think tank, Mexico Como Vamos, a figure that is about the same as it was when Mr. Peña Nieto took office. “Low salaries are a fundamental part of the economy,” Mr. Esquivel said. “A good part of the economy has no purchasing power.” Luis Foncerrada, the director of the Center for Economic Studies of the Private Sector, a think tank affiliated with Mexico’s main business alliance, argues that overall salaries have been depressed because 21 percent of the work force is either unemployed or working just a few hours a week. “It’s naïve to sit here with our arms crossed waiting for the reforms to have results,” he said. “It’s like telling somebody who is sick to wait five years for the cure to appear.” Source