As part of the 28th Mexican Congress of the Construction Industry on March 12, 2015, the Mexican Minister of Finance and Public Credit Luis Videgaray Caso delivered a wide-ranging speech, providing his expert perspective on Mexico’s economic situation. In this context, Videgaray made a particular note of the importance of the oil and gas sector to the future of the country. With the enactment of the 2014 Energy Reform, the energy landscape of the oil and gas sector has been transformed, leading Videgaray to see new opportunities and new actors ready to increase the potential of this fundamental industry for the Mexican economy in general. Although the situation is facing some difficulties due to the vertiginous fall in oil prices in recent months, the message from the Minister of Finance is clear, the Mexican oil and gas sector is not ready to stop.
First, he mentioned that two noteworthy events stood out in the economic evolution of the last few weeks which would have an impact on Mexico: the divergence in monetary policies of developed economies and the steep drop in oil prices. “Regarding the divergence in monetary policy, there have been a few times in history when the monetary authorities of the principal economies of the world moved in opposite directions. The Federal Reserve has now completed its quantitative easing program as its economy is now showing clear signs of recovery. A tightening cycle in the interest rate is expected to take place in the next few months, although nobody knows exactly when,” he noted. He contrasted this situation in the US with monetary policies in Japan, China, and Europe, which have moved in the opposite direction, namely toward fiscal expansion and loose monetary conditions. Videgaray therefore expected that this trend would continue, resulting in a rebalancing of capital flows around the world. We are seeing how assets denominated in different currencies are migrating into dollar assets, generating an important appreciation of the US currency against the rest of the world’s currencies. The euro is the most emblematic case, given its fall against the dollar over the last five years. The trend of appreciation of the US dollar against the euro can also be said for the yen and for emerging currencies,” said Videgaray. So far this year, the euro has seen a depreciation of 12% against the US dollar, the Brazilian real has depreciated by 15%, the Colombian peso by 8%, and even the Canadian dollar has now depreciated by almost 10%. The Mexican peso has been a part of this trend, albeit to a lesser extent than other currencies. According to the latest figures, the Mexican peso has depreciated by 4.5% against the US dollar. However, from a rarely analyzed point of view, the peso has strengthened against the euro, the Canadian dollar, the Brazilian real, and the Colombian peso. However, it remains true that the dollar’s appreciation and the corresponding depreciation of the peso against the currency of its main trading partner, with which it does over 80% of its foreign trade, is an important phenomenon for the macroeconomic environment of Mexico. Therefore, Videgaray announced that the Exchange Commission has taken steps to ensure that the Mexican peso’s market functions with order and liquidity. Furthermore, the government will be reducing its accumulation of international reserves. Mexico’s reserves stand at a historic high of about MX$194 billion, to which is added a flexible credit line of about US$70 billion with the International Monetary.
Videgaray then spelled out the actions that could be considered to ensure the peso’s continued strength. First, he ruled out the government entering into more debt or raising taxes. Instead, the government will seek to reduce public spending by spending less and spending better. He said that his Ministry was seeking to break with the last 15 years, when federal budgets stayed static, with a few additions being made. As per President Peña Nieto’s instructions, the budget for 2016 will be a zero-based budget where every program could potentially be cut or reduced. Videgaray admitted that such cutbacks could impact economic growth. However, he warned that an increased deficit would be worse as it would risk reducing market confidence in Mexican public finances.
Moving on to the National Infrastructure Plan, he said the government was seeking to gain more interest from the private sector and to use mechanisms such as public-private partnerships. “We are working with the Mexican Chamber of the Construction Industry in order to review the National Infrastructure Plan and to see which projects, originally to be financed by public expenditure, could be financed instead by the private sector through licenses, public-private partnerships, or any other forms of association.” The same is happening in the energy sector where PEMEX and CFE no longer have the budget conditions to meet all their previous obligations. As such, these will have to be replaced with new mechanisms that allow the participation of the private sector through the Energy Reform.
Videgeray then added that the construction industry had been helping Mexico to recover economically, including participating greatly in the 4.6% growth rate in job creation seen from February 2014 to February 2015. This construction boom has been particular active in the central and northern regions, which have seen this sector grow by 24% and 16% in the last year. Part of the government’s strategy in this area has been to spur development financing for the construction sector, particularly the Construction Industry Financing Program with NAFIN. This fund issues loans of up to MX$15 million to SMEs, both for working capital as well as for fixed assets. It has had a very good track record so far, benefiting over 3,000 SMEs in this sector. Alongside NAFIN, Bancomext is favoring the internationalization of Mexican construction companies and with Banobras in order to generate a product that provides more liquidity to the construction companies through this bank in public sector projects from different levels of the government.
A final major topic in Videgaray’s speech was the concept of the formalization of labor, namely bringing many more Mexican workers within a structured work environment. “To this end, we have developed different strategies that are encompassed within the “Crezcamos Juntos” (Let’s Grow Together) strategy, the fundamental purpose is to increase formal employment, namely to allow workers to access benefits such as social security, healthcare coverage, daycare centers, home loans, and loans for SMEs,” he said. During the first two years of this government, workers in informal labor rate dropped 1.8%, the first such drop seen in Mexico in many years. He again singled out the construction industry for praise, saying that it had traditionally faced problems, given the temporary nature of many of its jobs. “Yet, these results show what progress can be made through particular efforts,” said Videgaray. “We will continue making the combat against informality, through the Let’s Grow Together campaign, one of the largest priorities for the government. It will have a great bearing on this country’s positioning.”
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