Mexican economy shrinks in new president's first quarter

Joshua Howat Berger, Agence France-Presse

Posted at May 01 2019 06:59 AM

Mexico's President Andres Manuel Lopez Obrador arrives to give a speech during the inauguration of the Aerospace Fair 2019 at the Santa Lucia military airbase in Tecamac near Mexico City, Mexico April 24, 2019. Henry Romero, Reuters

Mexican President Andres Manuel Lopez Obrador got 2 troubling pieces of news Tuesday as the economy registered a surprise contraction in his first quarter in office and state oil company Pemex posted a steep loss.

The anti-establishment leftist won a landslide victory in Mexico's 2018 elections, and is promising to deliver "radical transformation" -- plus economic growth of four percent per year during his six-year term.

But his policies have unsettled the business world, and although polls indicate he remains popular, the health of Latin America's second-largest economy has emerged as a potential Achilles' heel.

Mexico registered a surprise 0.2-percent drop in GDP in the quarter from January to March, according to preliminary data.

It was the first full quarter under Lopez Obrador, who took office on December 1, and who got off to a rocky start on the economic front.

His year began with a series of strikes that affected railroads and factories, plus gasoline shortages caused by his government's decision to shut down fuel pipelines in response to rampant theft.

More broadly, the politician known as AMLO has alarmed investors by vowing to overhaul Mexico's "neoliberal" economic model and cancelling a new $13-billion airport for Mexico City that was already one-third complete.

The airport's top backer was Mexican telecoms billionaire Carlos Slim, the world's fifth-richest person, who warned that canceling the project would amount to "canceling the economic growth of the country."

'DIRE DATA' 

Economic analysts had predicted Mexico would post weak growth for the first quarter, but not a contraction.

The economy grew 1.7 percent last year, and 0.2 percent in the fourth quarter.

It was dragged down by the industrial sector, which registered a 0.6-percent contraction in the first quarter, and the services sector, which shrank by 0.2 percent, said national statistics institute INEGI.

Together, the two sectors represent around 90 percent of the Mexican economy.

The report "made for ugly reading," said London-based consultancy Capital Economics, calling the data "dire."

The services sector was previously "the one bright spot in an otherwise moribund economy over the past 12 to 18 months," it said in a note.

PEMEX BACK IN RED 

Lopez Obrador's beloved Pemex meanwhile added to his headaches by posting a loss of 35.7 billion pesos ($1.88 billion) for the quarter.

The troubled oil company -- Mexico's biggest -- said the loss was mainly due to financial costs caused by the depreciation of the peso against the dollar.

It was the latest bad news for both Pemex, whose $106.5-billion debt makes it one of the world's most indebted companies, and for Lopez Obrador, an energy nationalist who wants to restore the firm to its glory days.

With such massive debts, Pemex is struggling to make the investments it needs to reverse plummeting production, which has fallen from a peak of 3.4 million barrels per day in 2004 to less than half that today.

Lopez Obrador is trying to help the firm regain its footing with a series of cash injections, tax benefits and other rescue measures worth $5.5 billion.

But ratings agency Fitch, which downgraded Pemex in January, says the firm needs far more than that: $9 billion to $14 billion annually.

Lopez Obrador did have one piece of good economic news to celebrate: the Senate passed labor reforms Monday night that are seen as crucial to getting Mexico's new trade deal with the United States and Canada ratified in all three countries' legislatures.

The reforms aim to boost Mexican workers' collective-bargaining power and increase their wages -- something the US and Canada demanded in updating the countries' 1994 trade deal, NAFTA, a cornerstone of the Mexican economy.