Uncertain investment climate may hurt Mexico’s 2014 GDP growth

After a disheartening first quarter, economists say an uncertain investment climate amid government reform could hurt Mexico’s growth potential in 2014.

The country reported disappointing first-quarter growth, causing Mexican officials to slash their economic growth forecast from 3.9 percent to 2.7 percent.

Mexico's real GDP growth has slowed since bouncing back from economic crisis.
Mexico’s real GDP growth has slowed since bouncing back from economic crisis.

Officials blamed severe winter weather in the U.S., tax hikes in Mexico and disappointing exports for a sluggish start to the year.

Mexico’s finance ministry reported first-quarter growth of 1.8 percent, an acceleration from 0.7 percent expansion in the fourth quarter, but below the 2.1 percent growth expected by 24 economists surveyed by Bloomberg Industries.

The country’s weaker-than-expected GDP comes after a first quarter in which the U.S. GDP shrank 1 percent, according to the Bureau of Economic analysis.

The Mexican economy has fallen short of forecasts in four of the past five quarters. Economists surveyed by Bloomberg expect a 3 percent rise in GDP for 2014, above Mexico’s own forecast.

While Mexico has enjoyed relative stability the past two decades, promises of sweeping reforms from President Enrique Pena Nieto have scared off investors, according to Eugenio Aleman, a director and senior economist at Wells Fargo.

“If investors spend their money in the U.S., there’s no geopolitical risk,” Aleman said. “That’s not so true in Mexico.”

Nieto recently ended the country’s 75-year monopoly on oil production. Private companies were allowed to again drill for oil in December, but many investors are apparently not ready to bet on the estimated $30 billion a year industry.

“The government already took over the petroleum industry in the 1930s,” Aleman said. “Who guarantees they won’t come in and take it from investors again?”

Nieto promised comprehensive reforms — including overhauls in finance, labor and government transparency — to spur economic growth. But petroleum investment, economists said, requires at least a 20-year commitment.

“The expected time span for this kind of investment is so long, they need to know these reforms are legitimate,” Aleman said.

The Mexican Stock Exchange‘s Mexican Bolsa Index Friday closed at 2,465.85, down 1.42 percent from Thursday, but up 11.2 percent from March 14 when the index hit a 48-week low.

Among other impacts, GDP has been shown to affect poverty levels, according to a report by the 2013 by the World Bank.

Although Mexico boasts one of the lowest unemployment rates in the Western Hemisphere — 4.8 percent — more than 45.5 percent of the country lives in poverty.

The country’s unemployment rate is expected to drop to 4.45 percent in 2015, according to a survey of 26 economists by Bloomberg Industries.

While the U.S. economy’s improvement looks to have a positive impact on Mexico’s growth in 2014, analysts say much it depends on the direction of Nieto’s reforms.

“Everybody thought capital would flood into Mexico,” Aleman said. “We now know it won’t be as easy as everyone thought.”

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