Timid wage increases, a sharp cutback in family incomes, plummeting remittances from workers abroad, the modest growth in bank credits and the high level of unemployment could broadly reduce Mexico’s internal demand in the wake of the U.S. economic slowdown, according to a recent Standard & Poor’s report on Mexico’s economic solvency. Thus, the nation will not get the boost from abroad “to which we had become accustomed”, said central banker Agustín Carstens recently at the close of the rating firm Moody’s annual conference.

In such a discouraging context, it’s worth noting that faced with an outlook of definite economic slowdown, the wellbeing and purchasing power of the Mexican population at large has not recovered from the impact of the past recession. The average monthly wage of workers affiliated to the Social Security Institute has only risen by 7.8% to 7,570 pesos accumulated in the past two years, while the National Survey on Family Income and Expenditures reveals that the average monthly income of 11,645 (about US$950) is below average expenses of 11,844 pesos.

In its report, Standard & Poor’s emphasizes that the slow advance in total credits granted to individuals by banking institutions in Mexico has been one of the top limitations to internal demand in the country. According to the World Bank, Mexico has one of the lowest levels of bank credits worldwide as a percentage of GDP, with 23%, compared to Brazil’s 54%, China’s 127%, Japan’s 171% or 203% in the United States.

Sugar Solution Eyed

A decade after the expropriation of 27 sugar mills, the federal government is looking for a way to privatize the nine remaining mills that still operate in a government trust, and which rightfully belong to the private group Caze. If a proper negotiation is conducted, the process could conclude before the end of the Calderón administration, according to Agriculture, Livestock, Rural Development, Fisheries and Food Secretary Francisco Mayorga.

It may well be wishful thinking by the secretary, who did not provide specifics on the negotiations, much less deadlines or payment methods. The current administration inherited the problem of a totally unjustified expropriation, but has done little to resolve the injustice, and now Mayorga claims that a solution might be found, hopefully before the end of the current administration in December 2012.

Grupo Caze is the nation’s largest refined sugar producer with 27% of the total output. According to Mayorga, the government’s intention is allegedly to wipe out the outstanding debt of the seized mills so that they have a fighting chance when and if they are reprivatized.

2012 Budget Focuses On Infrastructure

If Mexico’s Congress approves the 2012 budget bill as it was submitted by the administration, infrastructure projects in several states, particularly among Gulf coast states, will be the concept reaping the most benefits next year, according to an analysis of budget 2012 line items. The aggregate total of the budget plan’s allocations to roads, bridges, schools, hospitals and other infrastructure is 434.3 billion pesos, 2.6% more than in 2011. The big if, however, is that many state governments don’t always undertake the specific projects that were outlines in the budget, and use resources elsewhere.

Among the states that stand to benefit the most from infrastructure budgets are Tabasco, which would get 17.3 billion pesos; Veracruz, with 13.6 billion; and three other states that would get better than 9 billion each: Campeche, Guanajuato and the Federal District. All together, the 2012 budget bill contemplates 11.4 billion pesos more for infrastructure.

There is a reason why some of the states that will get the larger increases are located along the Gulf and Pacific costs. According to the Finance Secretariat’s criteria, seaport installations are in dire need of repair and upgrading, as are highway networks in the coastal regions. Another major line item in next year’s budget is water works, including dams and reservoirs in the nation’s south and southeast regions.

Moderate Deficit Hailed by Analysts

The budget package proposed by the executive branch for next year sends a positive signal of fiscal consolidation in Mexico, and is seen as particularly responsible for an election year, when federal spending had historically risen, according to various analyses by international brokerage firms. For local private analysts, however, the budget plan is basically inertial, meaning that it does not contain elements to promote growth or jobs.

In separate studies, Barclays Capital and JPMorgan concur that the government maintains its intention of differentiating the Mexican economy from other countries that are facing an onslaught of uncertainty over their financial condition. BarCap’s Marcelo Salomón says the target deficit of 0.2% of GDP reaffirms the government’s commitment to phase out the fiscal stimulus implemented during the 2008-2009 crisis.

Analysts at the private think tank CIDE claim the government has enough margin to negotiate a public spending deficit of up to 0.5% of GDP, implying that greater spending would be advisable to spur growth. JPMorgan’s weekly analysis says the budget plan sends a clear signal that campaign spending will be curbed in an election year. BarCap and JPMorgan agree that the government’s growth targets of 4% for 2011 and 3.5% next year are realistic and reflect the anticipated slowdown generated by the global context.

Also, check out the following opinion columns:

“Rich and Powerful”, by Marco Mares

Implicitly, the Federal Electoral Tribunal grants a measure of certainty to the radio and TV industry, which was shaken to the core by the electoral watchdog. The tribunal has unanimously revoked the Radio and TV Industry Code approved by the Federal Electoral Institute (IFE) on June 27. The rejection, submitted by magistrate Flavio Galván and supported by the full board, was based on the unacceptable failure by IFE of consulting radio and TV concessionaires, as well as experts. Those with concessions rejected the law as unviable and also because they were never consulted before it was drawn up and implemented. The Trife ruled that while IFE is the sole authority to manage air times the state will get during elections, the law is not viable because IFE itself is not an expert on radio and TV, much less on telecommunications. The ruling indicates that IFE has the obligation of consulting those it regulates regarding new norms that affect the industry in any way.

“The Great Depression”, by Enrique Campos

The central bank’s benchmark interest rate does have a margin to lower inflation, but is clearly stable within the parameters established by the bank. The Mexican economy shows a clear slowdown, as international financial organizations are recommending an easing of monetary policy, and the Fed is close to implementing another liquidity boost. Since all these conditions are in place, why doesn’t Mexico’s central bank lower its rates? Because its mandate is not to guarantee economic growth. Its key function is to defend the purchasing power of the currency it issues. Unlike other central banks, Banco de México is not the guarantor of economic growth, although it would be a good thing if it was. Sadly, the central bank is mired in the same type of legislative and operational paralysis in which other institutions in Mexico are hopelessly caught.

“Strongbox”, by Luis Miguel González

If David Copperfield could perform one of his magic acts and make the euro zone problems disappear, the monster of economic dysfunctionality would still be everywhere. In a cup of coffee, in a tank of gas, in the mortgage bill. From Brazil to China. Following are some alerts that have nothing to do with the European crisis. One is the volatility of commodity prices. Gold has cornered headlines, but coffee, corn, wheat and rice are right up there too. Another is the sustainability of BRIC growth. Brazil and China are leaking oil, with inflation, real estate bubble and excessive credit troubles. The Arab Spring will bring economic instability to a region where 500 million people live. Also, don’t forget the U.S. horror movie, with 14 million unemployed, 10.9 million non-performing mortgages, the risk of BofA going bust, and a breakdown in the political arena. All eyes are on Europe today, but the truth is that there are crises elsewhere.

rmena@eleconomista.com.mx