62 Finance & economics The EconomistNovember 9th 2019
M
exican presidentstend not to get
the economy off to a flying start when
they first take office. The past six leaders
saw the economy shrink by an average of
0.4% during their first year, but went on to
enjoy growth of 3.5% in their sixth and final
one (see chart). So likely are governments
to enrich their allies at the expense of
everyone else that each transfer of power
causes investors to hang back until they
know where they stand. So it may not be a
shock that Mexico will barely grow in 2019,
the first year of Andrés Manuel López Obra-
dor’s presidency. But economists worry
that the malaise might linger this time.
Mr López Obrador rode to power on the
back of popular outrage against the status
quo. The left-leaning populist wants to
centralise power, boost the scope of the
state and balance the books—all while hit-
ting annual gdp growth of 4%, “double the
growth achieved in the neoliberal period”.
The list of headaches is long. Consumer
confidence, which rocketed after Mr López
Obrador’s inauguration, has slumped.
Manufacturers are struggling: in the past
year capital-goods imports are down by
16% in dollar terms, the biggest drop since
the global financial crisis. The pace of for-
mal job creation has decelerated over the
past year. Economists have repeatedly
slashed growth forecasts.
Not all the gloom is homemade. Ex-
ports, once a bright spot, are growing more
slowly, hit by sluggish demand in America.
Threats from President Donald Trump, first
to tear up the North American Free Trade
Agreement and then to impose tariffs on
Mexico to deter Central American migra-
tion, have added to the uncertainty.
But businesses also complain of mixed
messages from Mexico’s president. He
bashes the private sector while his advisers
hint that pro-business policies are just
around the corner. He scrapped a $13bn air-
port that was already under construction
because he deemed it too pricey; he or-
dered the renegotiation of a gas-pipeline
contract that he thought too generous. In
July Carlos Urzúa, the technocratic finance
secretary, resigned, accusing the govern-
ment of indulging in extremism over evi-
dence when making decisions.
The government’s fiscal commitments
have trapped it in a negative feedback loop,
says Gabriel Lozano of JPMorgan Chase, a
bank. A budget-surplus target of 1% for 2019
was supported by slashing the pay of pub-lic-sector workers, starting with the presi-
dent. But spending cuts have slowed the
economy. Tax revenues have undershot ex-
pectations, partly because the budget’s
forecast of gdp growth of 2% was rosy, and
also owing to an exodus of seasoned bu-
reaucrats from the tax-collection agency.
The government has raided half of the
300bn pesos ($15bn) in its fiscal-stabilisa-
tion fund to make up the shortfall. Next
year’s budget is also more optimistic on
economic growth than most economists.
The government’s commitment to budget-
ary prudence might also waver ahead of
mid-term elections in 2021. Another year of
fiscal disappointment seems likely, andcould clean out the government’s rainy-
day fund entirely.
For his part, Mr López Obrador wants to
splurge on pet projects, including an oil re-
finery in his home state of Tabasco and a
“Maya train” through the Mexican jungle.
With the economy ground to a halt, those
plans are not sustainable. Nor, loyalists
concede, is his sky-high approval rating.
Already he has had to dial back on more
generous old-age pensions.
External forces may offer a way out of
the mess. America’s trade war with China
means that Mexico ought to be luring in-
vestors looking to hedge against China
risk, says Luis de la Calle, an economist.
The gap between the Bank of Mexico’s in-
terest rates and those of America’s Federal
Reserve is 6.25 percentage points, bigger
than in other countries with an invest-
ment-grade credit rating. The government
wants to privately finance up to 1,600 infra-
structure projects, which the president
hopes will “reactivate” the economy.
A near-term economic boost should
also come from a big rise in oil production
next year, when private firms start pump-
ing oil under contracts signed as part of the
previous government’s energy reforms.
(Mr López Obrador has not allowed further
bidding rounds, though his advisers hint at
an opening next year.)
Pessimists fret that there is no opportu-
nity that this government cannot waste.
When taking office it could have tackled a
fundamental problem: an economic sys-
tem that enables crony capitalists and pre-
vents small firms expanding. It could have
dealt with worsening violence, or raised
poor levels of education. Overcoming all
this might have been worth a temporary hit
to gdp. The risk is that even if this govern-
ment gets through its first-year dip un-
scathed, no payoff awaits. 7MEXICO CITY
A government promising radical change serves up economic mediocrityMexico’s economyLife after neoliberalism
Bringing the economy back from the deadRookie errors
Mexico,GDP,%changeona year earlierSource:IMF *ForecastPresident’s first year in office19*151005200095908519801050-5-10