Loreto banks closed?

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By JUAN MONTES
Updated Feb. 21, 2014 12:02 p.m. ET
MEXICO CITY— Paul Noriega's travails reflect what went wrong with Mexico's economy last year. His company, a cleaning-products supplier whose main clients are public hospitals, was stalled for months, sales fell by half and some workers were laid off.

The reason: government spending didn't flow for much of the year.

"We hadn't lived anything like this in the last 12 years," says Mr. Noriega, a young Mexican businessman who runs the firm with his father. "Orders from the IMSS [the social security system] suddenly plummeted. We had to tighten our belts and use our savings to survive."

Massive delays in government spending are one of the reasons behind Mexico's poor performance last year. Latin America's second-largest economy expanded just 1.1% in 2013, the statistics agency said Friday, which translates into the creation of around 200,000 new jobs in a country of 112 million people.

The growth data poured cold water on the optimism with which President Enrique Peña Nieto began his administration in December 2012. Instead of the 3.5% growth initially expected in his first year in office, it was the slowest growth since the 2009 recession.

Mr. Peña Nieto has attributed the economic downturn mainly to the change of administration and weak export demand north of its border. "The U.S. recovery wasn't as strong as expected, and that affected the dynamism of our own exports. And then we have the turnover in government: as happens every six years, the rhythm of spending changes," Mr. Peña Nieto said in an interview this week.

Other factors also determined Mexico's sluggish performance, economists say.

The construction sector fell into recession due in part to the unsustainable pile of debt at the country's biggest housing construction companies. The lack of natural gas supplies in some regions also dented activity. And many investors postponed decisions until seeing the final outcome of Mr. Peña Nieto's economic reforms in energy and telecommunications, which passed Congress last year.

"Definitely, it was the perfect storm," said Jonathan Heath, an independent economist who has worked for Mexico's statistics agency.

But some analysts say the government's initial optimism and badly handled spending also had a crucial impact.

"First, the government asked Congress for a balanced budget in 2013...when the global economy was still fragile. That was a mistake because it involved a contraction of spending compared to the previous year," said Gerardo Esquivel, an economist at the Colegio de México university.

"On the other hand, it is now clear that Finance Minister Luis Videgaray neglected the daily management [of the economy] because he was too involved in the political negotiations to get the economic reforms passed in Congress," Mr. Esquivel added. He said government spending fell 10% in the first quarter of last year, compared to the 3% and 6% increases respectively seen at the start of the two previous administrations.

Last year was a busy one for Mr. Videgaray and his team. Some of the key officials appointed at the finance ministry, including the deputy finance minister and the deputy minister of spending, lacked any experience in the federal-government machinery. Also, working out complex banking and tax overhauls took up much of their time, according to several senior government officials who asked not to be named.

Several ministries with significant budgets, such as the transport ministry, or SCT, took a long time to start up. Regional delegates of the SCT, who are in charge of speeding up infrastructure projects and tenders, weren't named until April, according to the government officials.

By May, the economic slowdown was already evident. The government slashed its GDP forecast three times last year: first to 3.1%, then to 1.8, and finally to 1.3%.

Spending delays were starting to have notable side effects: suppliers weren't paid on time, and new tenders were postponed. For Mr. Noriega, the businessman, the data had a bitter effect. "By midyear, we had the warehouses full of stock waiting to be sold," he says.

The Finance Ministry started work over the summer on a request for Congress to approve a small budget deficit for 2013 and a wider one for next year to support economic growth through additional public spending—financed with more debt and new taxes.

From September, government spending accelerated, supported in part by the reconstruction efforts after several major storms hit the country, and by the end of the year the budget had been fully exercised.

But the harm to the economy was already done. The October-December period didn't see a recovery, growing just 0.2% from the previous quarter. For 2014, Mr. Peña Nieto expects the economy to expand an above-consensus 3.9%, although many analysts are seeing a weak first quarter.

"The recovery will take some time because the impact of the new spending won't be immediate," said Mr. Heath, the economist. "The new taxes have also created uncertainty and are already hurting household consumption and business confidence."

Mr. Noriega doesn't see light at the end of the tunnel yet. "As of today, we haven't seen any improvement in activity," he says.

Write to Juan Montes at juan.montes@wsj.com



[Edited on 2-21-2014 by wessongroup]