2019-11-09_The_Economist

The EconomistNovember 9th 2019 Finance & economics 69

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, and

could 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. 7

MEXICO CITY

A government promising radical change serves up economic mediocrity

Mexico’s economy

Life after neoliberalism

Bringing the economy back from the dead

Rookie errors

Mexico,GDP,%changeona year earlier

Source:IMF *Forecast

President’s first year in office

19*15100520009590851980

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