MEXICO SUFFERS SLINGS AND ARROWS AS SECOND ACT OF ITS SHAKESPEAREAN DRAMA UNFOLDS / THE FINANCIAL TIMES COMMENT & ANALYSIS

Global Insight

December 15, 2014 1:01 pm

Mexico suffers slings and arrows as second act of its Shakespearean drama unfolds

John Paul Rathbone, Latin America Editor

As growth fails to take off, can Peña Nieto avoid a tragic ending?

 

©Reuters

President Enrique Peña Nieto must prove his mettle as Mexico's voters grow restless

 

 

In Shakespearean tragedies, the second act — when the drama builds alongside the setbacks the protagonists must overcome — is often the longest and most painful. Something similar may now be happening to Mexico and its economy as the oil price slumps.

In act one, Enrique Peña Nieto won the presidency with a reform-minded team that promised to modernise Mexico. Previously insurmountable political obstacles were swept aside with apparent ease and a series of laws promulgated in rapid succession, most notably a groundbreaking change that allowed private investment in the energy sector for the first time in more than 70 years.

 

By early 2014, the government was riding high. Mr Peña Nieto was dubbed the “Man who saved Mexico” by Time magazine. Investors rubbed their hands at the $50bn of foreign investment expected in Mexican energy by 2020. All was going well. But now, in the second act, the glory has started to fade: the protagonist must prove his mettle, and the audience is growing increasingly restless.

 

Despite what Mr Peña Nieto trumpets as a 40 per cent rise in jobs created this year, economic growth has failed to take off; indeed, the government has already had to cut its growth forecasts four times. To compensate, the state has increased spending. Forecasters estimate next year’s fiscal deficit will rise to 4 per cent of economic output.

That is not overly worrying, but is almost double the annual average deficit of the previous two governments. It also challenges the economic orthodoxy Mexico has stuck to for 20 years. Luis Rubio, a political analyst, suggests the change may be due to a generational shift in government.

Meanwhile, the drama intensifies. Conflict of interest scandals erupt around the president and his finance minister. In September, 43 students also disappeared in the lawless state of Guerrero, a heroin production hub. The disappearances, an example of gross impunity and absence of the rule of law, goads disgusted Mexicans into action. Disquiet snowballs.

 

Furthermore, oil prices plunge by 45 per cent in six months and the peso by 10 per cent in just four weeks.

The oil price drop is unlikely to stop foreign companies’ plans to bid in next year’s oil auctions. But it may squeeze what they had planned to spend, thereby denting expected capital inflows and the government’s take. Rising inflation from the peso’s fall could also force higher interest rates, cooling the economy further. All of sudden, the virtuous cycle of faster growth, higher tax collection, and improved productivity looks much more uncertain than only a year ago.

Still, prospects could be much worse. Unlike, say, Russia, Mexico has dramatically diversified its economy since the default and oil price crash of the 1980s. Oil’s share of Mexican exports was only 11 per cent last year, versus nearly 40 per cent in 1990. Electronics and cars now account for a greater amount. Indeed, Mexico manufactures more goods than the rest of Latin America combined.

In addition, whatever oil Mexico does export is hedged at $76.40 per barrel, thereby protecting the treasury from further price falls in 2015. On the domestic front, oil revenues account for a third of government revenues, but local gasoline prices do not float according to international prices — another buffer. Still, if crude prices continue to slide, the government may have to cut spending in 2016.

Tragedy is usually defined as a drama in which the hero is brought to ruin as a result of a moral flaw and inability to cope with unforeseen circumstances. But over the past 20 years, Mexico has taken some control of its destiny, at least when it comes to commodity prices.

Greater potential for tragedy lies, instead, in the still commodity-dominated economies of South America.

 

Rather, Mexico’s deepest problems lie closer to home in the realms of the rule of law and security, which Mr Peña Nieto’s team admits it has, if not underestimated, at least failed to focus on sufficiently. A tragic denouement can yet be avoided. But it is too early to say that this drama will finish as one where All’s Well That Ends Well.