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Zero-Growth Year Is Price AMLO Pays for Mexican ‘Transformation’

Zero-Growth Year Is Price AMLO Pays for Mexican ‘Transformation’

(Bloomberg) --

Andres Manuel Lopez Obrador’s first year as president was a lost one for Mexico’s economy. Looking ahead, 2020 may not be much better.

Hurt by investor doubts about the government’s policy direction and its own obsession with fiscal austerity, the Mexican economy contracted 0.1% in 2019, its worst result in a decade, according to preliminary data released Thursday.

Zero-Growth Year Is Price AMLO Pays for Mexican ‘Transformation’

Analysts are quickly scaling back their estimates for this year. They now expect Latin America’s second-largest economy to grow just 1%, down from their 1.8% forecast six months ago, according to a Bloomberg survey. Some are even more pessimistic: Barclays Plc sees growth of just 0.6% and says there may be no domestic catalyst for a rebound any time soon.

“Mexico’s economy is going through a sharp slowdown,” said Delia Paredes, a Mexico City-based economist at Grupo Financiero Banorte, which this month cut its 2020 growth projection to 0.8% from 1.4%. “The latest data have been much weaker than we expected,” she said prior to Thursday’s report.

The stagnation is a hard blow for the president known as AMLO, who has repeatedly pledged to accelerate growth to 4%, double the pace of recent presidencies.

Fourth Transformation

AMLO was elected on promises to not only foster growth and prosperity but to radically change Mexico’s public sector, particularly the power relations between the state and private companies. The president brags that his administration is the “Fourth Transformation” of Mexico, as in another epoch-making moment of the country’s history following the War of Independence and Reform periods of the 19th century, and the Revolution of the early 20th.

And in some ways, he is delivering. In his first year in office, AMLO pushed to shake up a system that he said was riddled with corruption, as well as what he described as overly friendly relationships between government and businesses that hurt the Mexican people for decades.

Zero-Growth Year Is Price AMLO Pays for Mexican ‘Transformation’

Moves like shuttering the old presidential mansion, putting the president’s Boeing Co. 787 Dreamliner jet up for sale, holding daily news conferences and traveling to poor communities around the country on weekends have helped ingratiate AMLO with Mexican voters. One recent poll pegged his approval rating at 72%, making him one of the most popular elected presidents in the world.

But he’s also stirred up friction with the private sector, creating an uncomfortable environment for business that’s scaring away investment. Since his election in July 2018, AMLO has canceled a $13 billion airport for Mexico City that was already one third of the way to completion, halted oil-field auctions that brought in billions of dollars and forced natural gas companies to renegotiate longstanding pipeline contracts.

As a result, gross fixed investment has run down to levels not seen since the 2009 global crisis as Mexican companies can’t be sure that the administration won’t pull the rug out from under them.

“Investment remains very weak, in part because of domestic uncertainty,” said Carlos Capistran, chief economist for Mexico and Canada at Bank of America. “That’s the most important thing right now.”

In a rare critique of the administration, representatives from two of the nation’s top business groups this month warned that it’s getting increasingly hard for foreign companies to put their money in Mexico, calling for the government to work to communicate certainty and avoid conflicts.

AMLO Austerity

Other decisions played a role in putting the economy in stall. Intent upon halting the deterioration of Mexico’s debt ratios, which threatens its investment-grade credit rating, AMLO has pursued fiscal tightening at every opportunity. The government likely finished 2019 meeting its goal of delivering a 1% primary surplus, the second-best result of the past decade, which while reassuring to bondholders can still come at a cost for the economy.

“The lack of public investment explains two thirds of what is happening in Mexico,” said Marco Oviedo, chief Latin America economist at Barclays. “The government isn’t doing anything.”

MEXICO REACT: Stagnant GDP Keeps Pressure on 2020 Growth Outlook

AMLO has shrugged off such concerns, arguing that defining success through gross domestic product growth is an outdated neoliberal concept that fails to account for happiness and well-being, and that he’s promoting a more equitable distribution of wealth. To that end, he’s raised Mexico’s minimum wage almost 40% since taking office, which has, of course, contributed to his popularity.

“There may not be growth, but there’s development and well-being,” he told reporters after the data was released Thursday. Official measures of growth “could mean there’s lots of money in the hands of few.”

While some Mexico watchers speculate that the economy’s stagnation may lead AMLO to reverse course, he’s moved ahead instead, building an alternative airport and insisting that he won’t auction more acreage to private oil explorers.

The president’s recipe for speeding up growth involves a $46 billion infrastructure plan and nearly $100 billion in energy projects proposed by the private sector. The ratification of the successor to the North American Free Trade Agreement also should help reduce uncertainties with Mexico’s top trading partners.

MEXICO INSIGHT: USMCA Ratification More Relief Than Opportunity

Yet, the economy is in a rut even as the U.S., the buyer of more than 70% of Mexico’s exports, is growing at over 2%. Historically, when the U.S. economy slows, Mexico’s does too, and economists forecast a slight U.S. deceleration to 1.8% for 2020.

“Any negative surprise in terms of demand from the U.S. for exports is a huge risk for the Mexican economy,” said Felipe Hernandez, a Latin America economist at Bloomberg Economics.

In the meantime, inflation slowing to policy makers’ 3% goal allowed the central bank to lower its key interest rate by 1 percentage point last year, to 7.25%, with the central bank poised to cut again by a quarter point next month. Working against that monetary easing is the size of Mexico’s informal economy and the low penetration of bank lending.

Barclays’ Oviedo estimates that a full percentage point reduction in the rate only boosts Mexico’s growth by 0.1 percentage point. Still, he doesn’t see AMLO dramatically changing course.

“As things are relatively lukewarm and employment is there, he might continue to be very popular and won’t care about GDP,” he said.

--With assistance from Nacha Cattan.

To contact the reporter on this story: Eric Martin in Mexico City at emartin21@bloomberg.net

To contact the editors responsible for this story: Juan Pablo Spinetto at jspinetto@bloomberg.net, Robert Jameson, Walter Brandimarte

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