World Economy

Mexico GDP Contracts First Time in 3 Years

Mexico GDP Contracts First Time in 3 YearsMexico GDP Contracts First Time in 3 Years

According to the preliminary data released by Mexico’s statistical agency, INEGI, last Friday, the second-largest Latin American economy witnessed contraction in the second quarter for the first time in three years.

Dismal growth in manufacturing, agriculture and service sectors, and a decline in exports to the US had a negative impact on the country’s economy during the quarter, Seeking Alpha reported.

The final reading of the second quarter’s GDP growth, which is scheduled for release on Aug. 22, will be closely watched by investors. Hence, the Exchange Traded Funds having significant exposure to Mexico will also remain on investors’ radar.

The INEGI preliminary report showed that the Mexican economy contracted 0.3% in the second quarter from the previous quarter, implying a decline for the first time since the second-quarter 2013. Though GDP grew 2.4% year over year, it was lower than the first-quarter growth rate of 2.6%.

Decline in industrial production played an important role in dragging the GDP down during the second quarter.

According to the report, the industrial sector contracted 1.7% sequentially, reflecting the worst decline since the first-quarter 2009.

A decline of 0.1% in the agriculture sector and unchanged growth in the services sector also weighed on the Mexican economy. Multiple rate hikes in recent times had a negative impact on investment, which in turn dragged the economy down. In order to combat rising inflation on the back of a declining peso, the currency of Mexico, Banco de Mexico opted for two rate hikes this year.

  Declining Exports, Oil Output

Moreover, a drop in the country’s exports to the US also weighed on the second-quarter GDP. Also, the recently released “advance estimate” data of the Bureau of Economic Analysis shows that total imports by the US declined 0.4% in the second quarter after declining 0.6% in the first.

Imports of goods also dropped 0.9% in the same quarter, which was preceded by a first-quarter decline of 1.3%.

Separately, declining oil prices weighed on the country’s oil production, which in turn had a negative impact on the economy during the second quarter.

Petroleos Mexicanos, the state-owned oil manufacturer, continued to post losses amid record low levels of crude production despite the expansion in government’s expenditure on the producer. Moreover, domestic consumption, which remained one of the major drivers of economic growth, was sluggish.

  Rating Retained

When it comes to managing its debt, Mexico is better than Brazil, basket case Venezuela and Argentina, even as its new government is in the process of resuscitating the economy, Forbes reported.

Fitch Ratings recently reaffirmed Mexico’s investment grade status of BBB+, a credit rating Brazil lost last year after getting it in 2008.

For over a year now, Latin America-bound investors have preferred Mexico over Brazil. Brazil has been a place for regime-changing loving hedge funds, and long term value hunters.

Mexico, meanwhile, despite its own brand of social crises that differ from what is happening in the big South American countries, has managed to hold its own. Mexico doesn’t stink. It’s doing quite well.

The International Monetary Fund’s July World Economic Outlook forecast Mexico GDP to rise 2.5% this year and do even better in 2017. Not much better, but still beating Brazil. Venezuela and Argentina, due to various accounting problems with the governments there, are not even on the IMF list.

Due to Mexico’s ‘steady-as-she-goes’ economy, the market has turned to deeper discounts. In fact, the iShares MSCI Mexico fund is down year-to-date despite the fact that the fundamentals there, are better than they are in Brazil.

Mexico’s strengths counterbalance its obvious weaknesses, which include structural weaknesses in its public finances at the state level, oil dependence for balancing the budget, and institutional weaknesses highlighted by the high incidence of drug-related violence and corruption.

But unlike Venezuela, which has also been whacked by weak oil prices, the Mexico economy has proven to be resilient. The government is adjusting to external forces in a timely and orderly manner, Fitch said in its report.