Bank of Mexico Raises Alarm About Mexico’s Economy

“Particularly worrisome” is that this slowdown “has taken place in a context where the US economy is growing above potential.”

By Nick Corbishley, for WOLF STREET:

The bad omens are stacking up for Mexico’s faltering economy as both domestic consumption and investment dry up while the challenges facing the country’s heavily indebted state-owned oil giant, Pemex, continue to rise. That’s the broad conclusion in the minutes of the latest meeting of the Bank of Mexico’s governing board.

Mexico’s benchmark index, the BMV IPC, has fallen 15% in the last year. For the first time since December 2018, the Mexican peso is once again below the all-important psychological level of USD$0.05 (or 20.07 pesos to $1), after having fallen by 6% in the last month, due in part to the emerging market jitters set off by Argentina’s latest woes, which resulted in yet another selective default on its debt that markets expect to expand to a full default on its foreign-currency debt.

Then, of course, there’s Pemex, whose $100 billion of debt is perilously close to receiving a downgrade from investment-grade to junk from the second ratings agency. If that happens, the state-owned company would become the largest “fallen angel” in history, which will probably lead to the forced selling of more than $10 billion of its bonds as well as a possible downgrade of Mexico’s sovereign debt.

As if all that wasn’t enough, the economy has stopped growing, having registered a barely perceptible 0.1% second-quarter rise in real GDP, after shrinking 0.3% in the first quarter. Following in the footsteps of U.S. rating agencies, the IMF and a clutch of domestic and international banks, the Bank of Mexico — Banxico for short — sharply revised downward its 2019 GDP forecast for Mexico, from a range of 0.8%-1.8% to 0.2%-0.7%. It was the fifth time this year it had slashed its growth forecast.

Some board members described the recent slowdown as “greater than anticipated”. While global economic pressures are partly to blame — in particular the risks posed by the China-U.S. trade war, Brexit, a slowing European economy, and continued failure to ratify the United States-Mexico-Canada Agreement (USMCA) — what is “particularly worrisome”, said one board member, is the fact that this slowdown “has taken place in a context where the US economy (Mexico’s biggest trading partner) is growing above potential.”

Mexican exports continue to perform fairly strongly. But domestic consumption and investment are both sliding. According to central bank data, consumption growth has been declining for years, from 4.3% in 2016, to 3.1% in 2017 and 2.3% in 2018, but the trend appears to be intensifying. At last count, in May 2019, the annualized rate of growth was 0%. The consumption growth of durable goods is already in negative territory for this year, pointed out one board member, despite robust growth in both remittances — transfers of money by workers of Mexican descent mostly in the US but also other countries to individuals in Mexico — and wages.

Private investment, particularly in construction and in the purchase of imported machinery and equipment, is falling sharply. With seasonally adjusted data, investment in construction is at levels unseen since early 2006, when records began, noted one member. As we reported last month, there are two main reasons for this drop-off:

One, many private sector investors are afraid to invest. Since Mexico’s new government came into power in December, there has been much greater enforcement of laws and regulations concerning construction, which has made life more difficult for companies in the sector.

Two, public sector projects have ground to a virtual standstill. Mexico saw a a 24% year-on-year drop in public sector projects in May, compared to a much milder 1.2% fall for private sector works. This slowdown in public sector construction has been particularly pronounced in the capital, Mexico City, where almost 500 public and private development projects — over 40% of all the projects under way — have been halted or cancelled by the new city council.

Less than a quarter of private sector analysts surveyed by Banco de México consider the current economic panorama to be favorable for investment, with many blaming the downturn on a combination of domestic economic conditions and what the central bank calls “governance problems,” including public insecurity, the absence of rule of law and political uncertainty.

Some Banxico board members cautioned about the weakness of investor sentiment in Mexico, with one highlighting impacts from the government’s cancellation of a partly built airport for Mexico City, the suspension of private partnerships for Pemex, and a dispute with natural gas pipeline firms.

These criticisms risk aggravating already fraught relations between the country’s government and central bank.

And right now, with the country arguably facing its biggest economic challenge in a decade, smooth relations between the two are vital. Mirroring developments north of the border, the government has been pressuring the central bank to slash the benchmark interest rate, currently at 8%, to encourage consumption and private investment.

In mid-August, Banxico obliged, albeit timidly, reducing the benchmark rate by 25 basis points. For now there’s little sign of further rate cuts, especially given the bank’s deputy chairman, Javier Eduardo Guzmán-Calafell, strongly opposed the previous rate cut on grounds that it could reignite headline inflation, which, at 3.75%, is currently at its lowest point since late 2017. Less than a year ago, it was close to 7%.

But Mexico’s high interest rates, needed to tame inflation, have also attracted a massive inflow of “carry trade” hot money. This hot money is one of the main reasons why the peso has remained fairly stable in recent months despite all the problems. Slashing interest rates now could risk triggering a rapid reversal of those hot money flows, which in turn could hammer the peso further, precisely at a time when emerging market fears are on the rise across the globe. By Nick Corbishley, for WOLF STREET.

Construction industry has worst month since 2006, and fourth month in a row of declines. Read…  Hit by Epic Construction Downturn, Mexico Faces Reality: New President Tries to Get Folks to Play by the Rules, and Everything Stalls

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  51 comments for “Bank of Mexico Raises Alarm About Mexico’s Economy

  1. David Hall says:

    Mexican oil production has been falling since the 2000’s. They have shale oil and undiscovered deepwater potential.

    Their population is growing faster than the US or Canada.

    Their year to date GDP growth is nearly flat.

    Some Mexicans were harassed by criminal gangs. The 2018 Mexican murder rate was five times higher than the US murder rate.

    • 2banana says:


      Mexico has crazy tough gun control laws. Laws so strict that it is nearly impossible for an average law abiding Mexican citizen to legally own a gun. And in the entire country of Mexico, there is only one legal gun store open to the public.

      “The 2018 Mexican murder rate was five times higher than the US murder rate.”

      • Steve Graves says:

        Which would actually be relevant if the only factor determining violent crime in a nation were its gun laws, which is obviously a gross over-simplification of any society.

        Nice plug for the gun lobby, though.

      • Mike G says:

        It should not be news to anyone that the effectiveness of law enforcement varies from country to country.
        I can point you to numerous Western countries that combine gun control with effective law enforcement and murder rates a fraction of the US, but turning a discussion of the Mexican economy into yet another round of “But mah gunz” is not productive.

      • chillbro says:

        Strict gun control laws are useless when your northern neighbor floods your domestic markets with guns.

        • Winston says:

          Right, because criminals, especially drug cartels, would never be able to get them via illegal importation via the massive USED military weapons market in the WORLD? Because proficient illegal EXPORTERS can’t also be expert illegal IMPORTERS?

          Compare them to law abiding citizens who would not be able to get them to protect themselves from the cartels and bought off “law enforcement” personnel.

      • nick kelly says:

        Are you being sarcastic? There is a very great deal of illegal activity in Mexico. Organized insiders put semi- permanent professional grade taps on Pemex pipe lines. Pablo Escobar ran a multi-billion dollar cocaine empire in the open for decades with impunity. Among his routine bribes, a reported one hundred million to the Mexican President.
        Mass graves are discovered weekly. Often they beheaded corpses are left on display. Interfering or just discovering either of the above enterprises is a sure way to exit.

        One thing that may be hard to grasp: murder is so common it is not investigated. When a holidaying Canadian couple were found with their throats slashed in a luxury resort in Cancun, the staff had the room cleaned up in hours and ready to rent. So much for preserving the crime scene!

        The police announced the perps were the Canadian nurses who had left for Canada the same night. These poor ladies had to hire a lawyer to deal with this ludicrous accusation. An employee of the resort was never seen again

        No doubt the murder rate is five times higher. And this one didn’t involve a gun. But I guess the ones that do aren’t by ‘average law abiding Mexican citizens legally owning guns’ but by ‘non law-abiding Mexicans illegally owning guns.’

        Murder may be common there but it is illegal.

      • QQQBall says:

        And in the entire country of Mexico, there is only one legal gun store open to the public.

        You forgot Eric Holder’s fire sale outlet in PHX. :)

        • Citizen AllenM says:

          Look, stop being a total idiot.

          Every few months the largest gun bazaar this side of Kandahar (Crossroads of the West) takes place in Phoenix. They routinely have thousands of guns for sale privately in the parking lots for cash.

          Talking about any gun laws in America is a joke.

          Talking about taking guns is a joke.

          Spare me the feeble attempt by Holder to do something.

          Enjoy the daily body count on every channel and realize some of it may eventually hit home.

          But we have massive freedom!

        • QQQBall says:

          Citizen AM,

          The Holder/PHX reference was to Operation Fast and Furious.

    • Rat Fink says:

      Shale oil is of no benefit given it cannot be extracted profitably.

      As the situation continues to deteriorate for the small to mid-sized shale operators, the next victim will be the major oil companies. If you think I may be exaggerating, the data and charts reveal that the major oil companies are already struggling to make money producing shale.

      Mexico’s state oil company, Pemex, is a perfect example of the ongoing collapse in the global oil industry. Falling oil prices and declining production are putting severe pressure on the company’s financial balance sheet. It has been four long years since Pemex posted a small profit. However, since 2012, Pemex has suffered huge annual losses while its long term debt has exploded.

      The result is… Pemex is technically bankrupt. Now, I am not the only one saying this. There have been several articles written about horrible financial situation at Pemex. According to the following article, Mexico’s Largest Company Is Broke

  2. Iamafan says:

    “Particularly worrisome” is that this slowdown “has taken place in a context where the US economy is growing above potential.”


    Mexico does NOT create the necessary assets needed for a good bubble drink. They simply cannot provide the “sink” where debt can be spent on.

    • Vespa P200E says:

      “where the US economy is growing above potential.”

      Sorry as I think the USA’s economy has stalled and headed down like the ROW.

      USD is still almighty for now and it was nice when I was in Ireland last week and Korea a month ago but sense it is too strong and Trump wants to bring it down to boost the anemic exports.

  3. 2banana says:

    A data point:

    Mexico remittances (mostly from the United States) are bigger than all of their oil export revenue.

    • Dave Chapman says:

      Mexican remittances have exceeded oil export revenue since at least January, 2016. I suspect that they have been larger for most of the period since 2001.
      The real problem is that the net profit from oil exports keeps falling, as more effort is required to lift the oil. Offshore platforms are especially expensive, and are often not profitable.

  4. I give Mexico a double Jim Cramer buy. For those businesses leaving China, Mexico is the best choice. The population is only 1/3 of the US so the labor market will heat up quickly, inflation and the standard of living. They don’t need Pemex crude oil is entering a bear market, buy it on the cheap. The government’s new regulation will dovetail with this new super demand. Regulation and business are conjoined twins, they both need each other. There are no cultural impediments, there is the work ethic, a good education system, and as you not public projects are stagnant so money can go into supporting private enterprise. They have miles of coast line, arable land. Americans will want to live there, and take business and industrial skills with them, there are no mass shootings (unless you count drug cartels which is a problem economic development will solve.)

    • ObjectiveFunction says:

      Your historical namesake was also quite bullish on Mexico. But then again, he disappeared there…. :-/

  5. Senecas Cliff says:

    Unlike the U.S or Japan Mexico is not a credit creator. They get some hard currency by running factorys and selling veggies. But historically the biggest source of hard cash was oil exports from the Huge Cantarell oil field. Now that field is in steep decline and Mexico is effectively no longer a net oil exporter. Official or not this leaves narcotics as the main source of hard currency in to the country. As this business is not legal, it is enforced through violence instead of the court system, thus the rise in murders.

    • Rat Fink says:

      Building a wall starts to make sense.

      • Prairies says:

        The wall already exists, holes were dug to go under it. It’s the story of the rock and the river. The water won’t stop flowing, it just takes a new path.

        The wall is just for show, want popcorn while ya watch?

  6. Randall Hooker says:

    ExPat living there has this take:
    Mexico is not a nation ruled by laws. They may be on the books, but not enforced. Due to corruption.
    On a micro level the police forces in most cities are on a second payroll.
    And do not inhibit their shadow employers from extortion and murder.
    Most of the large city Mayors are getting a second paycheck or have their hand in the cookie jar as well. So loath to open a can of worms with downstream purges.
    Most of the municipal department heads are also on the take. You want water to your development? What is it worth to you?
    The Immigration office can be bought over the counter. With witnesses.
    The education system is from the stone ages (teaching jobs are hereditary even if your progeny can’t read or write) and the teachers union has massive political clout to keep it in the stone ages. And their leaders are robbing the membership and the State of millions.
    The money to maintain social order comes from criminal gangs in many remote areas. Buying loyalty and cover from the populace.
    The drug cash fuels corruption not because it is forced upon the politicians but because they are seeking it.
    Pemex is a classic example of how corruption destroys assets long term.
    And at this time, potentially an entire economy.
    All because the rule of law is not the rule in Mexico.

    • wkevinw says:

      Agree from what I know now.

      I have been to Mexico ~20 times, but not for 30 years now.

      A lot of people in the western US can say the same.

    • I could level many of the same accusations against the US system. How much does a high end Visa cost?

      • roddy6667 says:

        There are two programs I know of that will sell an outsider a US Green Card for $500,000. One is for buying a house for half a million cash, and the other is for starting or buying into a business for the same amount.
        Here in China I meet Americans who represent companies who have “approved” programs to buy into. There are still a lot of Chinese who believe that the streets in America are paved with gold.
        I met a family in the Raleigh-Durham area who got a Green Card by buying a house for $500,000 cash. They were very upset when they found out about property tax. There is none in China. They also found out that the high schools in America are very poor, and that they would have to send their kids to private school.

        • MC01 says:

          EB-5 visa: I have a relative who got his green card through it, using his parents’s money of course.

          Let’s just say that “buying a house” will not “buy a green card”. The original requirement was to invest at least $1 million in some endeavor that would create at least need to be created10 new jobs, but over the years it has been progressively weakened: TEA (Target Employment Areas) were created, where the threshold was lowered to $500,000, and State and County authorities became very apt at fine-tuning (some would say “fudging”) the definition of a TEA. If I remember correctly after 1995 the 10 jobs didn’t need to be created but merely “preserved”.
          The system has been terribly abused throughout the decades, usually by funding high-end hotels in areas that required a lot of imagination to be classified as TEA, areas with high unemployment and low wages.
          The FBI only started to take an interest in EB-5 abuse in 2015 and broke up a lot of “cash for residency schemes”, hinting the system may be even more rotten than we think.

          Starting in November EB-5 requirements will be substantially increased ($900,000 in a TEA and $1.5 million elsewhere) and there should be a tightening in how State and County authorities can define TEA.
          To the best of my knowledge Chinese authorities have done very little to stamp out the myriad of fraudulent schemes aimed at relieving locals with more money than common sense of their hard-earned cash by promising an EB-5 on the weakest premises.

          PS: please stop listening to Chinese propaganda. It’s not good for your health. And I am saying this as an investor in China and Hong Kong, so I know a thing or two about it.
          PPS: I know, but bad deals are made in good times and good deals are made in bad times. Less of a gamble than lending the Italian and Spanish governments money at the present rates.

        • meridagirl says:

          FINALLY! I have been waiting for someone to highlight this very important point!! Sure, you can buy your house outright with cash, but you can lose it all in 3 years if you don’t pay the property taxes! Add utilities, federal, state, local taxes, social security and medicare payments to the mix (if you want to keep that green card) and you have a recipe for feelings of rage and betrayal! Yep, the us gov’t isn’t as dumb as it looks. Thanks Roddy6667!

    • Keeper Hill says:

      If only the open borders crowd knew any of this
      Or cared

      • HowNow says:

        The “open borders crowd” are large agri-businesses and homebuilders and it’s not a very big crowd. The propaganda on this, blaming liberals, has been generated by the oligarchs who benefit from cheap labor. Watch the “Frontline” investigation of illegals being used and abused by Tyson Foods and similar.

        • Keeper Hill says:

          Yeah no. The candidates and Democratic party have made it quite clear their positions as well as the idea that non citizens should even be voting. But good try.

      • GirlInOC says:

        “open borders” is a red herring. This is meant to rile up the anti-immigration base with no basis in reality. The left does not support “open borders”….rather they support immigration reform and a pathway to citizenship for the millions of immigrants already living here, working, and contributing to the economy.

        • Petunia says:

          As a Latina who is against an open border because I have lived with the ramifications of it, I call you out as a liberal spinner. This issue was the biggest reason I walked away back in the 90’s.

          It breaks my heart to see blacks in this country support runaway immigration, when they are the ones which suffer most of the consequences. I see many black Americans living on the streets of CA, while illegals are on the dole(NGOs & govt) being cared for. Florida is even better for illegals than CA, if you get to FL, you get everything for free.

        • GirlInOC says:


          1) No, I’m not spinning the “open border” narrative. Democrats are for more security and spending on the border, not for a free-for-all come & go as you please immigration policy. That is being spun on the right though. “We are not going to just let people cross the border. An unlawful crossing is an unlawful crossing, if you do it in the civil courts, or if you do in the criminal courts.” -Sen Cory Booker

          2) Undocumented workers are ineligible for SNAP (“A person must be a U.S. citizen or an eligible, lawfully-present non-citizen to qualify for SNAP benefits.”) Nor are they eligible for federal Medicare and Medicaid. And in CA, we JUST passed a law granting health coverage to undocumented immigrants ages 25 and younger. It had previously been open for children to the age of 18. Because duh, children.

          Immigrants are some of the hardest working people in our society. I just don’t see a need to demonize them.

        • Petunia says:


          The things you cite are very recent developments on the part of the left because they are losing bigly on the immigration issue.

  7. WES says:

    Having lived and worked in many other countries, what I have noticed is that when the locals don’t invest in their own country but would rather get their money out of the country, then you should heed their warning and not invest your money in their country either!

    • Nicko2 says:

      Good advice! On the other hand, there are developing/emerging economies where remittances play a huge roll, in addition to FDI and other investment.

  8. gw says:

    I just wonder whether this is a canary for the state of the US. I don‘t know about the Mexican number in particular but the past the US numbers have been lagging and at times on the optimistic side.

  9. Iamafan says:

    Comparing Mexico and China is like night and day. Other than they both have inexpensive labor compared to the USA, I can’t find the similarities.

    • Javert Chip says:

      How about they’re both corrupt

      • Prairies says:

        So they are the same as every other country including the USA. Corruption is boring and widespread, that’s why so many nations had billionaires and millionaires outed in the Panama Papers. That isn’t a national trait, just a human trait in general.

  10. Weiser Wolf says:

    Re: “Private investment, particularly in construction and in the purchase of imported machinery and equipment, is falling sharply”

    That’s the key right there for Mexico and the rest of the globe, a lack of private investment!

    According to recent research from University College Dublin economics professor Morgan Kelly:

    “The absence of spatial correlation in the fitted residuals raises the possibility that the factors that lead countries within a region to follow similar growth paths work through the rate of equipment investment.”

    Also: DeLong and Summers (1991) found that the post-World War II cross-country dataset contained an extraordinarily strong correlation between growth and private investment in machinery and equipment. Public investment by state-owned monopolies did not do it. Investment in structures did not do it.

  11. roddy6667 says:

    “the US economy is growing above potential”
    Or is it just borrowing more money to keep the party going?

    It’s like your neighbor who has a bigger house, nicer cars, and expensive vacations on the same pay as you. What you can’t see is the crippling debt which is about to collapse his life and send him into bankruptcy soon.

  12. MC01 says:

    I wonder how long it will be before the Bank of Mexico will slash interest rates further and further since it’s apparently a panacea for all evils. After all it has been a smashing success in both Australia and India and just wait next Thursday… the ECB will cut rates again and magic stuff will happen.

    And I also cannot but wonder at the timidity of these central bankers who cave in at any request from the media regarding monetary policy, no matter how patently absurd, and then sheepishly “leak out” these concessions were made only in face of strenous opposition. Right.
    Even more so than other major central banks, the Bank of Mexico has a chief mandate which is to keep inflation under control, and cutting rates just when inflation is going back to semblance of sanity flies in the face of it. If this is a signal, this is a Powell- and Draghi-style white flag… waved even before the first shot of the war.

    • HowNow says:

      I’m surprised that you’d blame the media and overlook the tantrums thrown by Trump.

      • MC01 says:

        The media have been calling for “extraordinary” fiscal and monetary policies all over the world for over three quarters now. India, Italy, France, Finland, Germany, Indonesia, Brazil, Mexico herself… you name it.
        This is a worldwide problem of enormous proportions because it means whoever advises the media and/or pays them has no clue how monetary and fiscal policies work and has been paying no attention to how the US economy was doing under a tightening monetary regime, albeit this tightening was moving as fast as an asmathic ant with some heavy shopping and was cut abruptly for no reason in particular.

        And may the Powers That Be forgive me, but like him or hate him the current US President has some very shrewd PR people advising him on economic matters. The US economy keeps on doing great: I forced Powell to cut rates. The US economy starts sputtering: Powell is too timid about rate cuts and asset purchases.
        These folks understand very well the mentality of the typical unsophisticated stock market speculator, who associates rate cuts with big jumps in equity prices, which apparently is all that matters these days.

        I’ll leave you with the comment an Australian historian made about the Japanese plans to take Malaysia and Singapore in 1941-1942: “They weren’t perfect. In fact they were full of holes and wild gambles. But they were far better than what Commonwealth forces had, and it is all that mattered”. ;-)

        • HowNow says:

          MC01, I have the highest regard for your commentaries and am trying to understand where you stand on macro-economic efforts by the Fed.
          “…it means whoever advises the media and/or pays them has no clue how monetary and fiscal policies work and has been paying no attention to how the US economy was doing under a tightening monetary regime…”
          How do you think monetary and fiscal policies SHOULD work? The Austrian model, imo, is wishful thinking: the most recent example was from Greenspan who trusted that financial market-forces would take care of themselves. Financial wizardry left him, and the Fed, in the dust. On the other hand, Keynesian directives have never really been implemented, although they’re blamed when blaming gets going in earnest – use fiscal stimulus to jump-start economies in a funk are never tempered once the economy is running under its own steam.
          Not that I’m arguing in favor of stimulus and monetary easing, but the reason given for the Great Depression was two-fold, that the market would self-correct and the idea that a “cleansing” was needed to drain the financial swamp and restore virtuous economic behavior. The Taft-Hartley act is also blamed but that may be overstated, as I’ve read.

          If you were king, how would you handle the massive economies that rely on central banks and that are semi-political creations?

        • Petunia says:

          How Now,

          The fed was not created to manage the economy. It was created as a clearing house for the member banks and a lender of last resort to those same member banks. The only interest rate they controlled was the interbank lending rate in their network.

          The interest rates member banks charged customers were market rates, whatever the market would bear, and were different in different markets. The fed needs to go back to their original mandate and let rates get set in the markets through demand. The fed should not have any role in the economy beyond its original mandate.

        • MC01 says:

          My idea of “clueless” is much simpler: why keep on repeating the same mistakes and expecting different results?
          Negative interest rates have literally ravaged the European banking system, completely destroyed the fixed yield market and spectacularly failed in their stated intent of buying some time for France, Italy and Spain to put order in their fiscal house of cards. In short a failed experiment. So why double down on it?
          As we were taught at the Uni, try something different (such as if a Grignard reaction doesn’t start according to the textbook, try heating the flask with a hairdryer set at maximum strength ;-))

          I have no magic wand nor special qualification, but I am firmly convinced “activist” central banks should be taken behind the shed and shot at dawn. Jawboning financial markets and encouraging real estate speculation is not something they need to concern themselves with. Let that role to politicians.
          My ideal policy is “We are hiking rates by 25bps every quarter and letting securities roll off at a rate of €80 billion per quarter over the same time frame; we’ll re-assess the situation in three years” followed by total silence no matter what.
          Italy has yet another budget crisis? German exporters are not lining their pockets as much as they used to? French billionaires are losing a ton of money on those junk rated investments they love so much? Spanish real estate speculators are going burst? Let them have a little taste of real life, it’s not always sunshine and lollipops.

  13. HowNow says:

    Petunia, the role of the Federal R. has changed over time, but it always had more responsibility than what you’ve described. Check Wikipedia.

    Besides… the initial efforts were ineffective. Congress had to change legislation to make it more effective.

    • Petunia says:

      How Now,

      Please don’t cite Wikipedia to me as a reliable source on the fed. I know their role has changed, but my point was that it shouldn’t have changed. It should go back to being a giant bailout fund for the member banks, its original mandate. Had they stayed on course, the last financial disaster would have been resolved a lot sooner.

      • HowNow says:

        I know for a fact that the moon is made of green cheese. Now don’t argue with me with some crap from NASA. I happen to know…

  14. Alex says:

    Cool news

Comments are closed.