Mexican President Pena Nieto will sell his robust energy plan to Congress in an effort to spur private foreign investment and end the state’s de facto control of its oil reserves.
But negative economic data threatens to dog Nieto’s young administration.
“Following the release last week of a much worse than expected 0.7% q-o-q seasonally-adjusted contraction in Q2’13 GDP, we are now expecting the economy to expand by 1.6% in 2013, a far cry from the 3.5% level we and the market were expecting at the beginning of the year,” writes UBS economist Rafael De La Fuente.
In a new note to clients, De La Fuente writes that the future of Nieto’s government will be decided in the next 125 days, when Congress votes on his reform package amid public resistance and an expected economic downturn. De La Fuente writes:
The slowdown in activity is largely attributable to external headwinds, to the manufacturing sector’s inability to get much lift, and to the ongoing problems in the construction sector, which has been hit by a double whammy of sluggish infrastructure spending by the government and the dire financial straits faced by the country’s largest home builders. However, what is widening the slowdown and leaving Mexico on the brink of recession is the fact that that job growth has slowed markedly. The economy now looks poised to generate roughly half the new jobs it created in 2012. For Mexican households, which did not enjoy much real wage growth in this cycle, which have limited access to credit, and which have not seen a recovery in remittances, the fall in employment growth pulls the rug from under their feet in terms of their ability to spend. No wonder then that private consumption is also compromised at this point.
De La Fuente believes the government will (and should) attempt to enhance overall revenues and reduce its fiscal dependence on oil through Nieto’s reforms. That will prove difficult given the current economic, legislative, and social environment.
“We remain on the glass-half full camp: we think this administration understands what is at stake and that progress on key reforms will be made,” De La Fuente concludes.