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Oil output drop holds Mexico's growth

Mexico's growth slows as oil output drop outweighs services

Petroleumworld.com 02 01 2017

Mexico's growth slowed in the fourth quarter, dragged down by falling oil production, even before the full impact of President Donald Trump's potential to hurt the economy was fully felt.

Gross domestic product rose 0.6 percent from the previous three months, according to preliminary figures released by the national statistics institute Tuesday, matching the median forecast of 16 economists surveyed by Bloomberg. That's a slowdown from the third quarter, when the economy grew at the fastest pace in three years. From the previous year, GDP expanded 2.2 percent, also matching analyst projections.

The outlook for 2017 worsened significantly with Donald Trump's election in November. Economists have cut growth expectations as his promise to end or overhaul the North American Free Trade Agreement and make Mexico pay for a border wall upset decades of stronger cooperation between the nations, damped investment projections and sent the peso to a record low. Surging gasoline prices have added to expectations for faster inflation, higher interest rates and a weaker economy overall.

"The uncertainty on Trump's policies is the main issue," said Marco Oviedo, the head of Latin America economic research at Barclays Plc, who expects growth to slow to 0.3 percent in the first quarter. "Once we know the final outcome, we can assess the impact in the economy."

The peso strengthened after the report, rising 0.3 percent to 20.7192 per dollar in morning trading in New York. The peso has weakened 12 percent since Trump's election, the most among major world currencies, and sank to a record low beyond 22 per dollar earlier this month.

Economic growth from the previous quarter was led by services activity, which expanded 0.7 percent, while farming output grew 0.4 percent. Industrial activity was stagnant. Final figures are scheduled to be released on Feb. 22.

Mexico's central bank, led by Governor Agustin Carstens, is expected to raise its key interest rate a half point to 6.25 percent next week, according to the median estimate in a Citibanamex survey. Analysts in the same survey expect the economy to grow 1.5 percent this year, the least since 2013, and inflation to climb to 4.8 percent.

"The deceleration that we expect for this year has little to do with what happened in the fourth quarter," Carlos Capistran, Bank of America Corp.'s chief Mexico and Canada economist, said before the release of the GDP report. "There's uncertainty coming from Trump and all the policies that can be implemented in the U.S., but also uncertainty coming from within Mexico and the fact that there are presidential elections next year and people are already wondering what could happen there."

A poll published by Mexico City-based newspaper Reforma this month found 27 percent of voters favor the opposition Morena party of populist Andres Manuel Lopez Obrador in next year's presidential election, compared with 24 percent for the conservative National Action Party and only 17 percent for President Enrique Pena Nieto's Institutional Revolutionary Party.

Exports rebounded in the fourth quarter, bolstered by the weaker exchange rate. Sales abroad increased 11.1 percent in November from a year earlier, the most since 2012, and expanded 6.6 percent in December.

The export growth outlook has been damped by Trump's idea for a "big border tax" on Mexican imports. Trump said the U.S. could impose a 35 percent tariff on vehicles made in Mexico, threatening an auto industry that has been a pillar of the nation's manufacturing sector. Such a measure could have a significant impact on Mexico, which sends about 80 percent of exports to the U.S.

Trump's statements have also dimmed the outlook for foreign direct investment. Mexico lowered its FDI projection by 16 percent to $21 billion earlier this month, according to the federal agency for investment promotion, from an earlier estimate of $30 billion. Since Trump's election, Ford Motor Co. canceled plans to build a $1.6 billion factory in Mexico and the chief executive officer of Fiat Chrysler Automobiles NV said the company may close its Mexican plants if the U.S. imposes sufficiently high tariffs.

While Mexico is attempting to work with the Trump administration, Pena Nieto last week cancelled a trip to Washington, which would have begun today, after Trump said it would be better to call off the visit if Mexico wasn't prepared to pay for a wall along the almost 2,000-mile border between the two nations. Funding the barrier is an idea Mexico has consistently rejected; Foreign Minister Luis Videgaray in an interview with Televisa on Monday called the issue irreconcilable.


Story by Erick Martin from Bloomberg News.

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