When Mexican president Andrés Manuel López Obrador swept to a landslide victory in July 2018, his government pledged to push public and private investment to 25 per cent of GDP in a bid to jolt the country’s economy out of a longstanding rut.
Instead, investment has fallen as a series of investor-unfriendly moves deterred inflows. López Obrador’s step last month to push through a law that would drastically change electricity sector rules is just the latest example, investors have warned.
He has also scrapped a partially built airport and brewery, cancelled electricity auctions, rewritten gas pipeline contracts, upset processed food manufacturers with new labelling requirements and pushed plans to ban subcontracting of jobs.
CEESP, a private sector think-tank, said the recent decision to prioritise the state electricity company was the 15th initiative by López Obrador, his Morena party or the government to undermine investor confidence in the past two and a half years.
Mexico is battling to haul itself out of its deepest recession since 1932 with only limited help from its government, which has held back from launching the kind of ambitious fiscal support measures undertaken by other major regional economies such as Brazil.
As a result growth is not expected to recover to pre-pandemic levels for another five years according to the IMF.
“They would have struggled to find a worse time to present this bill,” Carlos Salazar, head of Mexico’s biggest business lobby the CCE, told the Financial Times. “There is no doubt that this will cause more problems. No investors will want to invest.”
López Obrador believes that playing hardball with a private sector he accuses of corruption and unfair competition gets results as part of his self-styled mission to “transform” Mexico by eradicating malpractice.
He frequently brushes off suggestions the economy is in trouble by claiming to have “other data”. He highlights record remittances — $40.6bn last year, some 3.8 per cent of GDP — as a key aid to consumer spending.
López Obrador predicts the Mexican economy will grow by 5 per cent this year — more bullish than all economists’ estimates — but even that would not make up for the 8.5 per cent contraction in 2020.
And sustaining growth will be hard. “If anyone tells you that you can grow 5 per cent without 25 per cent [of GDP] total investment, they’re lying,” Carlos Urzúa, López Obrador’s first finance minister, told the FT in 2018.
With millions of jobs lost and businesses shut in Latin America’s second-biggest economy because of the pandemic, and 44 per cent of workers unable to make ends meet on their salaries, economists say the president needs to boost investment to save millions more people from falling into poverty.
“Recovering lost ground is going to take a long time, the investment climate is very strained. The signals are not good,” said Jessica Roldán, chief economist at brokerage Finamex. “In the medium and long term, it’s impossible to grow without investment.”
Yet investment is falling further and further behind. Gross fixed investment — the sum of public and private spending on plants and machinery — was barely above 19 per cent of GDP in the third quarter of last year. It has not fallen to such levels since 2009, during the global financial crisis.
Foreign direct investment has slumped by more than $10bn during the pandemic and most of that is reinvestment of profits rather than greenfield projects, according to official data.
Private investment now only makes up 16.6 per cent of GDP, down from nearly 20 per cent in 2018, according to the Mexican Institute for Competitiveness (IMCO), a think-tank.
And although López Obrador has touted a handful of major infrastructure projects, including a refinery, an airport and a train line, public investment has fallen to 2.5 per cent of GDP — down from 2.9 per cent when he took office, CEESP said.
“It seems like the current federal government is determined to limit investment, and as a result, economic growth,” CEESP said.
Alonso Cervera, managing director in emerging markets research at Credit Suisse, said: “Mexico doesn’t seem to have a clear model for economic growth. It looks like the model of development is to build a couple of landmark projects like the refinery, the train and the airport and hope people will be happy with cash transfers.”
López Obrador prides himself on social spending, including pensions to the elderly and educational grants.
But economists warn the lack of investment will translate into lower growth prospects in future. Mexico has failed to grow much above an average of 2 per cent per annum for decades. Now, Cervera said potential growth was on course to reach just 1.5 to 2 per cent.
“We’re facing a very clear fall in potential growth,” said Roldán.
The electricity bill, which has been fast-tracked and is widely expected to pass, has only deepened the gloomy outlook.
The US Chamber of Commerce called it “the latest in a pattern of troubling decisions taken by the government of Mexico that have undermined the confidence of foreign investors in the country”.
And because of the pandemic, it said, now is “the precise moment enhanced foreign direct investment in Mexico is needed more than ever”.
TORONTO – Canada’s main stock index was down more than 200 points in late-morning trading, weighed down by losses in the technology, base metal and energy sectors, while U.S. stock markets also fell.
The S&P/TSX composite index was down 239.24 points at 22,749.04.
In New York, the Dow Jones industrial average was down 312.36 points at 40,443.39. The S&P 500 index was down 80.94 points at 5,422.47, while the Nasdaq composite was down 380.17 points at 16,747.49.
The Canadian dollar traded for 73.80 cents US compared with 74.00 cents US on Thursday.
The October crude oil contract was down US$1.07 at US$68.08 per barrel and the October natural gas contract was up less than a penny at US$2.26 per mmBTU.
The December gold contract was down US$2.10 at US$2,541.00 an ounce and the December copper contract was down four cents at US$4.10 a pound.
This report by The Canadian Press was first published Sept. 6, 2024.
TORONTO – Canada’s main stock index was up more than 150 points in late-morning trading, helped by strength in technology, financial and energy stocks, while U.S. stock markets also pushed higher.
The S&P/TSX composite index was up 171.41 points at 23,298.39.
In New York, the Dow Jones industrial average was up 278.37 points at 41,369.79. The S&P 500 index was up 38.17 points at 5,630.35, while the Nasdaq composite was up 177.15 points at 17,733.18.
The Canadian dollar traded for 74.19 cents US compared with 74.23 cents US on Wednesday.
The October crude oil contract was up US$1.75 at US$76.27 per barrel and the October natural gas contract was up less than a penny at US$2.10 per mmBTU.
The December gold contract was up US$18.70 at US$2,556.50 an ounce and the December copper contract was down less than a penny at US$4.22 a pound.
This report by The Canadian Press was first published Aug. 29, 2024.
The crypto market has recently experienced a significant downturn, mirroring broader risk asset sell-offs. Over the past week, Bitcoin’s price dropped by 24%, reaching $53,000, while Ethereum plummeted nearly a third to $2,340. Major altcoins also suffered, with Cardano down 27.7%, Solana 36.2%, Dogecoin 34.6%, XRP 23.1%, Shiba Inu 30.1%, and BNB 25.7%.
The severe downturn in the crypto market appears to be part of a broader flight to safety, triggered by disappointing economic data. A worse-than-expected unemployment report on Friday marked the beginning of a technical recession, as defined by the Sahm Rule. This rule identifies a recession when the three-month average unemployment rate rises by at least half a percentage point from its lowest point in the past year.
Friday’s figures met this threshold, signaling an abrupt economic downshift. Consequently, investors sought safer assets, leading to declines in major stock indices: the S&P 500 dropped 2%, the Nasdaq 2.5%, and the Dow 1.5%. This trend continued into Monday with further sell-offs overseas.
The crypto market’s rapid decline raises questions about its role as either a speculative asset or a hedge against inflation and recession. Despite hopes that crypto could act as a risk hedge, the recent crash suggests it remains a speculative investment.
Since the downturn, the crypto market has seen its largest three-day sell-off in nearly a year, losing over $500 billion in market value. According to CoinGlass data, this bloodbath wiped out more than $1 billion in leveraged positions within the last 24 hours, including $365 million in Bitcoin and $348 million in Ether.
Khushboo Khullar of Lightning Ventures, speaking to Bloomberg, argued that the crypto sell-off is part of a broader liquidity panic as traders rush to cover margin calls. Khullar views this as a temporary sell-off, presenting a potential buying opportunity.
Josh Gilbert, an eToro market analyst, supports Khullar’s perspective, suggesting that the expected Federal Reserve rate cuts could benefit crypto assets. “Crypto assets have sold off, but many investors will see an opportunity. We see Federal Reserve rate cuts, which are now likely to come sharper than expected, as hugely positive for crypto assets,” Gilbert told Coindesk.
Despite the recent volatility, crypto continues to make strides toward mainstream acceptance. Notably, Morgan Stanley will allow its advisors to offer Bitcoin ETFs starting Wednesday. This follows more than half a year after the introduction of the first Bitcoin ETF. The investment bank will enable over 15,000 of its financial advisors to sell BlackRock’s IBIT and Fidelity’s FBTC. This move is seen as a significant step toward the “mainstreamization” of crypto, given the lengthy regulatory and company processes in major investment banks.
The recent crypto market downturn highlights its volatility and the broader economic concerns affecting all risk assets. While some analysts see the current situation as a temporary sell-off and a buying opportunity, others caution against the speculative nature of crypto. As the market evolves, its role as a mainstream alternative asset continues to grow, marked by increasing institutional acceptance and new investment opportunities.
