The Average Mexican Not Feeling the Benefits of Economic Overhaul

The central bank chief calls it a “temporary pothole.”

Whatever the term, Mexico’s economy has hit some turbulence – despite the most ambitious overhaul to its business structure in decades.

Tax hikes have dampened consumer confidence, retail sales remain stagnant, and low U.S. demand for Mexican-made cars and televisions slowed the economy earlier this year to its lowest point in four years. Mexico grew at a sluggish 1.8 percent rate in the first quarter of 2014, forcing the government to ratchet down its forecast to 2.7 percent growth for the year.

Bankers and economists still voice hope that Mexico is on the threshold of faster growth because of the opening of the energy, banking and telecommunications sectors. “We know that the reforms don’t have an immediate effect and that it is necessary to have patience and persevere,” a Spanish banker, Francisco Gonzalez Rodriguez, chief executive of Banco Bilbao Vizcaya Argentaria, or BBVA, told a forum this week.

“I am sure that we will see the ‘Mexican moment’ in 2015,” said an executive of BBVA’s operations in Mexico, Vicente M. Rodero.

But after media predictions that Mexico’s economy would soar after President Enrique Pena Nieto came to office in 2012, Mexicans are tired of waiting. Pena Nieto’s approval ratings, currently at 48 percent, are high for the region but low by traditional Mexican standards for a president in the second year of a six-year term.

“The government has a long way to go to convince the Mexican public that it’s doing a good job in providing jobs, economic opportunities and rising incomes,” said Duncan Wood, director of the Mexico Institute at the Woodrow Wilson International Center for Scholars in Washington.

Since coming to office, Pena Nieto has ushered through a sweeping plan to rebuild the Mexican state by curbing monopolies, increasing competition, restructuring the tax system and opening up crucial sectors to foreign investment, including the energy sector, which was nationalized in 1938.

Pena Nieto told bankers this week that cracking open the oil and gas industry “signifies the most important economic change in 50 years” in Mexico.

Some leftist legislators remain skeptical and complain bitterly that the ruling Institutional Revolutionary Party has slated congressional debate on framework legislation on the energy sector opening to occur in mid-June as soccer-mad Mexicans turn their attention to the World Cup tournament in Brazil.

Once the framework legislation passes through Congress and the impact of foreign investment is felt in a year or two, the government says the energy sector alone will add 1.5 percent a year to Mexico’s economic growth.

Some private economists are less certain. They say economic acceleration won’t come until later in Pena Nieto’s term, which ends in 2018, and that the overhaul is likely to produce turmoil in some sectors in part because foreign investors will demand higher productivity.

“New technology displaces workers,” said Alfredo Coutino, Latin America director for Moody’s Analytics, a provider of global economic analysis.

As the state oil company, Petroleos Mexicanos, or Pemex, associates with foreign oil giants, he said, it will need to slash its own workforce, which in 2012 stood at around 151,000 employees, twice the number as foreign companies such as ExxonMobil, Shell, Petrobras and BP.

“Pemex won’t need 50 people to drill a new well. It’ll only need two or three people,” Coutino said.

“Reforms don’t work their magic overnight,” echoed Deborah Riner, chief economist with the American Chamber of Commerce in Mexico City. “Mexicans expected quicker results, and for reasons that are quite valid.”

Riner said that she remains optimistic about prospects later in the decade as uncompetitive sectors of the Mexican economy face pressures to open up.

“The fact that Hacienda (Mexico’s finance secretariat) is talking about a 5 percent growth rate by the end of the (six-year term) is a sign that they are getting realistic,” she added.

One of the challenges for the Pena Nieto government is to pull informal workers in a black economy into the formal economy – within reach of the tax collector. Of Mexico’s total working population, about 59 percent labor in the informal economy, without paying taxes or receiving social benefits such as health care, shaving as much as 3 percent to 4 percent off potential economic growth.

It’s a difficult sale.

“If you can be in the informal economy and not pay taxes, why be formal?” Riner asked.

Coutino agreed that a government pledge to offer health care and other services to those who remain outside the formal economy has not proven attractive.

“When the government comes to you and says, ‘I want you to pay taxes,’ me, as an informal employee, I would say, ‘I don’t need social security. We have the worst health system in the world,’ ” Coutino said.

©2014 McClatchy Washington Bureau
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