Tags: Mexico | growth | exports | US

Mexico Cuts Growth Forecast to as Exports to US Slow

Tuesday, 20 August 2013 07:54 PM

Mexico’s government slashed its growth forecast for this year as exports to the U.S. stagnate, reviving speculation of a second interest rate cut this year.

Mexico’s economy will expand 1.8 percent this year, down from a previous forecast of 3.1 percent, deputy Finance Minister Fernando Aportela told reporters in Mexico City. The revision came hours after the National Statistics Institute said the economy grew less than analysts forecast in the second quarter.

With industrial activity slumping 0.6 percent in the second quarter from a year earlier, gross domestic product expanded 1.5 percent, less than forecast by any of the 17 economists surveyed by Bloomberg, who had a median estimate of 2.3 percent. The economy contracted 0.7 percent in the second quarter from the previous three months, making the first half the slowest period of expansion since the end of the 2009 recession.

“The risk of economic stagnation is high,” Ociel Hernandez, the head of fixed income at Grupo Financiero BBVA Bancomer SA, said in an e-mailed response to questions. “A scenario that justifies a 50-basis-point cut in the overnight rate is on the table.”

The report strengthens Bancomer’s forecast that the central bank will cut its 4 percent reference rate in September, only the second cut since 2009, Hernandez said.

Traders are assigning a 20 percent chance of a reduction this year, based on swap-rate contracts used to speculate on borrowing costs, up from 8 percent yesterday.

Central Bank Outlook

The peso gained 0.8 percent Tuesday to 12.9745 per dollar.

Construction activity contracted 4 percent in the quarter from a year before amid a drop in government spending. Activity in agriculture, livestock and fishing industries increased 1.3 percent, and service sectors such as transportation, finance and media grew 2.6 percent.

Stagnant exports to the U.S., Mexico’s biggest trade partner, and muted public spending led the central bank to cut its growth forecast for this year to between 2 percent and 3 percent from 3 percent to 4 percent.

“There is that fear that the third quarter will be another weak quarter,” Rafael de la Fuente, an economist at UBS AG, said in a telephone interview from Stamford, Connecticut.

Credit Suisse Group AG lowered its 2013 growth forecast to 1.3 percent from 2.8 percent today, while Barclays Plc lowered its forecast to 1.4 percent from 2.5 percent.

The statistics agency updated its base year in Tuesday’s report to 2008 from 2003 and revised past GDP figures.

Muted Exports

Mexican exports increased just 0.6 percent in the first six months of the year, the slowest start to a year since the 2009 recession and compared with 7 percent growth in the first half of 2012.

Wal-Mart de Mexico SAB, the largest retailer in Latin America, saw sales at Mexican stores open at least a year drop 3.1 percent in July from a year earlier, more than the 2 percent decline projected by Credit Suisse Group AG. That followed a drop of 1.8 percent in same-store sales in Mexico in the second quarter.

“The economy remains challenging in Mexico,” Rafael Matute, Walmex’s chief financial officer, said on an earnings call on July 25, citing lower remittances from the U.S.

New President

Investors had become more optimistic on the Mexican economy as President Enrique Pena Nieto, who took office in December, pushes to change the constitution and open the energy industry to more private investment. The administration last week presented an energy bill it says will boost annual economic growth by 2 percentage points by 2025.

Mexican annual inflation slowed to 3.47 percent in July, within the central bank’s 2 percent to 4 percent target range for the first month since February, as farm prices fell.

Government spending fell 5.1 percent in real terms to 1.45 trillion pesos in the first five months of 2013 compared with the year-earlier period, according to data from the Finance Ministry.

Mexico will benefit if U.S. growth accelerates. U.S. consumers are the least pessimistic in more than five years, homebuilders are the most upbeat since 2005 and purchasing managers say their factories are churning out goods at the fastest pace in almost a decade. The Bloomberg Consumer Comfort Index this month reached its highest since January 2008 and the Standard & Poor’s 500 Index has gained about 16 percent this year, reaching a record on Aug. 2.

Construction Turnaround

Central bank Governor Agustin Carstens said Aug. 7 that the slowdown in Mexican construction should reverse in the second half of the year as public spending picks up.

ICA SAB, Mexico’s largest construction company, stands to benefit from a rebound in government spending and the administration’s 4 trillion peso ($306 billion) program of public and private investments in highways, railroads, ports and other infrastructure, according to Carlos Legaspy, who oversees about $350 million in emerging-market debt, including ICA bonds, at Insight Securities Inc.

“We expect that public construction won’t remain an impediment to economic growth, but on the contrary, start boosting the economy,” Carstens said.

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Mexico's government slashed its growth forecast for this year as exports to the U.S. stagnate, reviving speculation of a second interest rate cut this year.
Tuesday, 20 August 2013 07:54 PM
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