Thursday, June 13, 2024

Economic outlook not as rosy as it was a month ago as confidence eroded

In the space of a single month the outlook for the Mexican economy in 2019 in terms of the value of the peso, growth, inflation and interest rates has deteriorated significantly.

And some economists believe that the forecast could become even gloomier in the months to come and that president-elect López Obrador, who takes office in 10 days, is partially to blame.

A month ago, the Citibanamex financial outlook survey, which canvasses the opinions of more than 20 private sector economists, predicted an exchange rate of 18.85 pesos to the US dollar at the end of 2019.

But the same survey conducted this month revealed a consensus that one greenback would buy 20 pesos at the end of next year, a prediction that is steady with the current exchange rate.

López Obrador’s announcement late last month that the new Mexico City International Airport project will be cancelled generated concern among investors that wasn’t based solely on the potential financial impact of the decision but also the manner in which it was made.

Financial institutions and risk analysts have warned that if the new government continues to make important decisions via public consultation, a loss of confidence in Mexico, from both domestic and international investors, will follow.

“The deterioration of economic expectations is happening quickly and I wouldn’t be surprised if in the next surveys they deteriorate even more, even if nothing [negative] happens,” said Ernesto O’Farrill, president of brokerage firm Bursamétrica.

“There are several factors that are being brought on [within Mexico] as well as an international environment that is further clouding the internal factors that are eroding confidence,” he added.

Despite scathing criticism from the private sector and a large protest in Mexico City over the airport cancellation and the public consultation that preceded it, López Obrador was not deterred from announcing another referendum that will be held this weekend to seek opinion on the Maya Train and a new oil refinery as well as a range of social programs.

The president-elect has said that his government will target 4% annual economic growth and that the infrastructure projects he has proposed will help to achieve it.

But López Obrador’s growth goal, at least for next year, appears fanciful.

Bursamétrica economists are forecasting GDP growth of just 1.5% in 2019, half a percentage point less than what they were predicting last month.

Analysts consulted by Citibanamex also cut their growth projections between October and this month, albeit by a more modest margin from 2.1% to 1.9%.

O’Farrill believes that growth estimates could even drop into negative territory at some point after López Obrador becomes president.

“With very poor communication from the transition team and poor signals from the new Congress, confidence has diminished more than normal. What’s normal is for a six-year presidential term to begin with a lot of expectations, with prospects for investment but what’s happening now is the opposite,” he said.

Gabriela Siller, a director at Banco Base, said the reduction in the value of the peso over the past five weeks has placed greater pressure on inflation, which in turn led the Bank of México to raise its benchmark interest rate by 25 basis points to a nearly 10-year-high of 8%.

Higher interest rates, she said, act as a disincentive to consumption and investment, which will translate into lower economic growth.

Citibanamex is currently predicting an inflation rate of 3.9% in 2019 compared to a 3.7% rate it forecast last month.

Bursamétrica, Scotiabank and Pro Asset Management are anticipating even worse inflation figures next year, with forecasts of 5%, 4.34% and 4.2% respectively.

Analysts from the same institutions said they don’t foresee another interest rate hike this year or next, meaning that they expect rates to remain steady at 8%. However, that figure is 0.75% higher than their prediction last month for the close of 2019.

In contrast, analysts consulted by the news agency Bloomberg last week said there is a 100% probability that the central bank will increase rates again next month.

The Bank of México itself said in a statement that it would take any necessary action, including holding or hiking rates, to get inflation on track to achieve its 3% goal.

Source: El Financiero (sp) 

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