Policy in Focus 1: Peña Nieto announces seven actions to improve household’s welfare
On January 4, President Peña Nieto published a message for the end of the year and the challenges for 2015. He also used the message to launch seven initiatives to “improve the welfare of Mexican households”:
1) As a result of the energy reforms, government will lower the cost of electricity prices for 2015 for both firms and households (likely through the payment of additional subsidies, although this hasn’t been formally confirmed); 2)There will be no further increases in petrol prices; 3) Telephone fees in the country will be lower as a result of the telecoms reform; 4) In order to provide access to digital TV, the government will provide digital TVs to 10 million poor households; 5) As a result of the financial reform, young entrepreneurs between 18 and 30 years will receive credits to open their own businesses; 6) The government plans to launch a fiscal package to foster the housing sector In order to promote economic recovery and access to housing services. 7) A special fiscal regime for Chiapas, Guerrero and Oaxaca.
The Government has been slowly increasing the prices of petrol and gas over the last five years by gradually removing huge, regressive, subsidies. Fixing (or even lowering) the petrol price as announced as the second ‘initiative’ is actually feasible; however, this would actually be thanks to the drop in international oil prices, rather than the result of the energy reform, since implementation will take some time.
The initiative to give TVs represents a significant opportunity cost for the Government. The total cost of the programme is MXN$19b, which could be use to invest in public infrastructure or social programmes. In addition, in 2013, only 25.8% of the population had access to digital TVs, and only 30.7% of the households had home internet access. This means that most of the families benefitting from this initiative will not be able to fully use the functions of the TVs. The majority of poor households have far more pressing issues, such as low wages, lack of access to healthcare and social security, etc, and approximately 21.2% of the total population of the country has no access to basic domestic white goods and assets.
The housing policy has been one of the major problems behind the economic slowdown: the crisis in the construction sector in 2013 was triggered by an excess of supply of houses that no one wanted because there were constructed in zones far away from the main cities and industrial centres without basic infrastructure (the reason behind Mexico’s problem of abandoned houses). In addition, only workers in the formal sector can access Government support to buy a house. Only 40% of the labour force will therefore be able to benefit from this initiative, not those who most need it (see July economic report).
Finally, the fiscal regime for the south will need a set of complementary policies to be successful: larger investments in social infrastructure, transparency in the allocation of budget for the states, and policy coordination between the Ministry of Trade and Ministry of Social Development.
Overall, these initiatives could foster growth in certain sectors such as manufacturing and telecoms, but they won’t compensate for the lack of sustained growth in income per capita, nor really having a permanent effect on individuals’ or households’ income. GDP per capita actually decreased in 2013, since the economy grew around 1.09%. Preliminary figures show that economy grew 2.1% in 2014, meaning that GDP per capita for 2014 remains at levels similar to 2012.
Monthly Economic Monitor Banxico’s December survey maintained its 2014 GDP growth expectations in 2.19% compared to last month’s. The new forecast of the Ministry of Finance is consistent with this figure. Whilst the November survey had a 3.51% forecast for 2015, in December this forecast slightly decreased to 3.50%. In order to deliver growth rates above 3%, the domestic demand must recover from 2013 slowdown. The latest data for the US economy for 4Q2014 suggests that exports could help the economy to grow for the 1Q2015.
The end year general inflation forecast for 2014 decrease to 4.06% and for 2015 it increased to 3.54%. The inflation for 2014 is still slightly over Banxico’s benchmark (3%+/-1). Some of the increase in general inflation is explained by non core inflation from energy and commodity prices. The current depreciation of the Mexican peso means that the Central Bank will have to keep stabilising the currency to avoid overshooting and pass-through.
Forecasts for the Mexican peso (MXN) reflect the effects of oil prices explained above. The Central Bank has a sufficient amount of foreign reserves to deal with current volatility in financial markets. The USD/MXN year-end expected exchange rate for 2014 is 14.23.