| MEXICO CITY, March 17
MEXICO CITY, March 17 After a rush of euphoria
triggered by the promise of sweeping reforms to boost the
Mexican economy, growth is failing to live up to expectations
and small business owners like Enrique Paz are feeling the
A series of tax increases and a roll-back in fuel subsidies
is denting consumption and it will likely be 2015 at the
earliest before the economy starts to feel any boost from a
landmark opening of the state-controlled energy sector.
Wrap in wobbly demand from top trade partner the United
States and a flagging construction sector, and the Mexican
government's 3.9 percent growth target for Latin America's
second-biggest economy looks increasingly unrealistic.
The market is already dialing back estimates, with analysts
polled by the central bank forecasting 3.2 percent growth.
"There are taxes on top of taxes. Buying power is down. The
people don't have money to spend," said Paz, 44, who says sales
at his kiosk in downtown Mexico City have fallen 40 percent as
new levies forced him to raise prices on snacks and sodas.
President Enrique Pena Nieto forecasts his reform drive,
which spans education to energy, will boost growth to around 5
to 6 percent. The policy overhaul has helped Mexico steal the
limelight from the region's struggling No. 1 economy, Brazil.
But the government has so far failed to rev up growth, which
averaged 2.4 percent in the decade before Pena Nieto took power
in December 2012. The economy grew just 1.1 percent last year.
"The reforms have been oversold and on balance this year the
effect ... will be neutral or slightly negative," said Rodolfo
Navarrete, head of analysis at Vector, a brokerage that sees
growth of just 2.3 percent this year.
Pena Nieto took office vowing to lift Mexico by ending state
energy firm Pemex's oil and gas monopoly, improving a
paltry tax take and creating more competition for corporate
giants like Carlos Slim, who dominates Mexican telecoms.
Even before lawmakers had passed all of Pena Nieto's
reforms, markets had endorsed him, bringing yields on government
debt to record lows and the peso to a nearly two-year high.
Rating agencies followed suit, and Mexico became only the
second country in Latin America to win a coveted "A" grade
sovereign credit rating from Moody's Investors Service.
"This is a watershed moment for Mexico," fellow rating
agency Standard & Poor's said, after Mexican lawmakers signed
off on an energy overhaul the government says should add 1.1
percentage points to growth by 2019. But that is a long way off.
Data last month showed Mexico's economy slowed sharply in
the fourth quarter as industry and services disappointed,
dragging annual growth to a four-year low.
Many expect the finance ministry to begin cutting its
projection this year as it did in 2013, when it slashed an
initial forecast of 3.5 percent down to 1.3 percent.
Most pessimism stems from weak factory exports, which have
fallen for five months in a row, as U.S. demand for Mexican
manufactured goods was undermined by bad weather.
TURNING THE CORNER?
A rebound appears to be under way in the United States, the
destination for nearly 80 percent of Mexican exports, as U.S.
manufacturing growth accelerated in February. Also, Mexican
factory output rose in January the most in over a year.
"This positive print must be taken with a pinch of salt,"
Nomura Securities economist Benito Berber said in a client note,
pointing to a sagging construction sector.
Headwinds are also hitting consumption after Pena Nieto's
reform to boost weak tax collections took effect in January.
The law raised income taxes on the wealthiest, cut fiscal
benefits for companies and boosted levies on junk food and
"The economy's still not picking up as we expected," Daniel
Servitje, chief executive of Mexican bakery group Grupo Bimbo,
said on an earnings call. "The market ... was soft and it's
Fitch estimates that volumes at Mexican bottlers will fall
by 5 to 7 percent and bottler Coca-Cola Femsa says it has
boosted prices by 16 percent, citing the reform.
The tax increases have also fueled inflation, which surged
above the central bank's tolerance ceiling to hit an eight month
high in January. The number of formal jobs fell that same month.
Meanwhile, retail sales have also been weak, and consumer
confidence was at four-year lows until a bounce in February.
"There is a generalized negative feeling in Mexico that
contrasts dramatically with the very positive perception outside
of Mexico," said Gerardo Rodriguez, a managing director at
BlackRock and a former deputy finance minister.
The ministry argues the fiscal reform will add 0.1
percentage point to growth next year by bringing more workers
into the formal sector and boosting their productivity.
The drop in consumption should also be offset by new
government spending, thanks to non-oil fiscal revenues that rose
23 percent in January from a year ago, and a budget that allows
the state to run a 1.5 percent deficit to underpin growth.
But some economists are skeptical about the offset, arguing
that financing the deficit could require the government to take
resources away from the private sector.
"It's unclear how this expansive fiscal policy is going to
create the boost that the government says it will," said
Jonathan Heath, a Mexican economist.
And the energy reform is unlikely to yield quick results.
Berber says it will raise foreign direct investment by about
$10 billion annually - but not until at least 2016, a year
beyond his prior estimate and the finance ministry's.
"Maybe it was wishful thinking to expect that investment
would come in 2015," said Berber, who added that Colombia and
Brazil only saw oil-related FDI begin to accelerate four and 12
years respectively after oil sector reforms were approved.
Finance Minister Luis Videgaray has taken pains not to fan
hopes the reforms will boost growth in the next quarter. "It is
a strategy to increase potential growth in the next years and
the next decades," he told Mexican radio.
Some economists say investors are wise to be patient.
"Mexico has promised so much on the reform front, and yet we
have yet to move convincingly from Mexico's disappointment to
Mexico's moment," Morgan Stanley economist Gray Newman said in a
client note. "I suspect the strength is still to come."