Emerging

Investment has stalled

st  
11  
EcoEmerging// 1 quarter 2020  
economic-research.bnpparibas.com  
Mexico  
Investment has stalled  
Having more or less stagnated in 2019, economic growth is likely to bounce back a little in 2020, boosted by private consumption  
and net exports. Despite an infrastructure programme that is largely open to the private sector, the outlook for investment is  
struggling to improve. One year after Andres Manuel Lopez Obrador, generally known as AMLO, came to power, his economic  
policy is still hard to decipher. The lack of clarity on energy sector reform is also affecting investor sentiment. At the same time, the  
risk of a loss of control of the public finances is growing: against a background of low growth, maintaining the austerity programme  
favoured by the government will prove more difficult from 2021.  
A small improvement in growth in 2020  
1
- Forecasts  
Having more or less stagnated in 2019, growth is likely to bounce  
back a little in 2020. Private consumption will remain the main  
engine of growth, boosted by the increase in real wages and  
remittances from foreign workers (up nearly 9% y/y over the first  
three quarters of 2019). As in 2019, exports are likely to make a  
positive contribution to growth, despite a slight slowing in the US  
economy.  
2
018 2019e 2020e 2021e  
Real GDP growth (%)  
2,0  
0,1  
0,6  
1,7  
Inflation (CPI, year average, %)  
Budget balance / GDP (%)  
4,9  
3,7  
3,1  
3,4  
-2,1  
-3,2  
-3,7  
-3,8  
Public debt / GDP (%)  
53,8  
-1,8  
47,8  
-0,9  
50,3  
-1,1  
53,5  
-1,2  
Current account balance / GDP (%)  
External debt / GDP (%)  
36,5  
37.0  
180  
39,6  
178  
39,8  
178  
However, the outlook for investment has not seen any clear  
improvement. Over the first three quarters of 2019 private  
investment fell by nearly 4% year-on-year. This fall reflects investors’  
caution with regard to the AMLO administration since it was elected  
in July 2018, and their wait-and-see attitude to the policies to be  
pursued during his term of office.  
Forex reserves (USD bn)  
174,8  
Forex reserves, in months of imports  
Exchange rate USDMXN (year-end)  
3,8  
3,5  
3,6  
3,6  
20,0  
18,9  
18,5  
18,3  
e: BNP Paribas Group Economic Research estimates and forecasts  
2
- Investment in decline  
Investment, %, y/y  
Total investment  Capital goods ▪▪▪ Construction  
With the aim of providing some reassurance and improving  
prospects for investment, the government announced a massive  
infrastructure programme at the end of November. This includes a  
total of nearly 150 projects for a total budget of USD 43 billion, or  
nearly 4% of GDP, which is very broadly open to the private sector.  
The first phase, covering the transport and telecoms sectors, is  
likely to begin in the first quarter of 2020. However, several of the  
projects announced were already planned and partly financed, and  
operational difficulties could significantly delay their progress.  
Meanwhile, the second phase of the plan, due to provide project  
details, particularly in the energy sector, has yet to be published. All  
in all, even if several projects do get under way in the first quarter of  
10  
5
0
5
-
-10  
2
020, the increase in investment will remain limited.  
-15  
The energy sector has a central role  
2016  
2017  
2018  
2019  
Source: INEGI  
Announcements regarding the energy sector are eagerly awaited.  
First, because changes in the future involvement of private investors  
in the sector remain very uncertain. When he came to power in  
December 2018, AMLO announced the cancellation of the energy  
reforms introduced by the previous government and his intention of  
putting two publicly-owned companies, PEMEX (responsible for oil  
industry operations) and CFE (the national electricity company) at  
the heart of the sector. Under this approach, the involvement of  
private-sector operators is likely to be reduced gradually over the  
course of his term.  
2019, the government also indicated a change in the rules  
governing the “clean energy certificates” mechanism, with the aim of  
limiting the involvement of private investors in this market,  
encouraging the development of the electrical power market and  
thus increasing the weight of CFE.  
As with the cancellation, a year earlier, of the construction of a new  
airport, this decision took investors by surprise and served to  
increase investor caution with regard to the government.  
Since the end of 2018, the government has effectively brought an  
end to private tenders for the project to build a new refinery and  
suspended the planned tenders to supply power to CFE. In October  
At the same time, the operational and financial position of public  
companies, particularly PEMEX, represents a significant source of  
vulnerability for the Mexican economy. In July of last year, the  
st  
12  
EcoEmerging// 1 quarter 2020  
economic-research.bnpparibas.com  
government presented a fairly unconvincing five-year business plan  
based on very optimistic assumptions (both for production growth  
and forecasts of reserves), which further limited cooperation with  
private investors and called for substantial investment in refining, a  
loss-making business. The government also announced an increase  
in financial support to the company (again, this was probably  
underestimated), together with a reduction in tax on oil revenues.  
3
- Oil production has stabilised at low levels  
PEMEX oil production, millions of barrels per day  
3.6  
3.4  
3.2  
3.0  
Recent capital injections (USD 5 million in September 2019) have  
helped improve the short-term financial position, but this remains  
very fragile for the medium term. According to IMF estimates, even  
assuming a stabilisation of production over the next five years and  
the investment that has been announced under the development  
plan, the company is likely to continue to make losses, which will no  
doubt require fresh injections of capital, which would hit the public  
finances. In addition to which, the possible difficulties experienced in  
refinancing the debt would bring further pressure.  
2.8  
2.6  
2.4  
2.2  
2.0  
1.8  
1.6  
2
005 2006 2007 2008 2010 2011 2012 2013 2015 2016 2017 2018  
Source: PEMEX  
Fiscal austerity maintained  
But for how long?  
When it presented its 2020 budget, the government renewed its  
commitment to supporting growth without degrading the public  
finances or increasing taxes and duties during the first part of its  
term (i.e. up to 2021).  
The government’s contradictions are weighing on medium-term  
prospects. The country remains exposed to a change in investor  
sentiment, and the lack of clarity in economic policy, particularly  
concerning energy reforms, has reinforced the wait-and-see attitude  
adopted since the election. At the same time, the risk of a loss of  
control of the public finances is growing: against a background of  
low growth, maintaining the austerity programme favoured by the  
government will prove more difficult from 2021. Spending had  
already been cut significantly by the previous government (close to  
Under this framework, the budget incorporates an increase in  
spending of only 1% (in real terms, relative to the 2019 budget). As  
indicated by AMLO, the Energy Minister (whose budget has  
increased 20-fold) and the state oil company PEMEX (whose  
budget has increased by nearly 9%) have been particularly favoured,  
to the detriment of several social programmes and the budgets of  
the federated states. According to government forecasts, the  
primary surplus and the government deficit are likely to be 0.7% and  
13% of GDP in 2019, from 17% in 2015), leaving little room for  
manoeuvre, and FEIP reserves will not be enough to cover the  
shortfall in revenues (and financing requirements at PEMEX) over  
the whole of the government’s term. Lastly, the informal economy  
remains very large in Mexico (58% according to INEGI), suggesting  
that even if the fiscal reform promised by AMLO is introduced in  
2.6% of GDP respectively (from a projected 1% and 2.7% in 2019)  
and the government debt ratio will stabilise at 46% of GDP.  
The government’s commitment might, however, be hard to meet, as  
the assumptions made in the budget look over-optimistic. The  
government is expecting GDP growth of 2% in 2020, and an  
increase in oil production (combining production from the state oil  
firm PEMEX and private production) rising to 1.95 million barrels per  
day.  
2
021, revenues would not increase by enough to offset the fall in  
revenues resulting from the weakness of growth.  
However, since the beginning of 2019, oil production has stabilised  
at around 1.7 million barrels per day (see Chart) and the Mexican  
National Hydrocarbons Commission forecasts a fall in production of  
around 5% in 2020. On this assumption, the loss of revenue is likely  
to be around 0.5% of GDP, or a figure close to that estimated by the  
Ministry of Finance for 2019.  
The government indicated that the loss of revenue for 2019 would  
be offset by drawing on the reserves of the Oil Revenues  
Stabilisation Fund (FEIP) to the tune of 0.6% of GDP. According to  
the IMF, these reserves were the equivalent of around 1.3% of GDP,  
which means that the government could repeat the exercise in 2020.  
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