Mexican President Felipe Calderon’s infrastructure-spending plan is too small and too slow to lift the economy out of recession this year, said Luis Arcentales, a New York-based economist with Morgan Stanley. That should serve as a lesson for the Obama administration as it prepares an $825 billion stimulus package that includes $90 billion for public works projects in the U.S., he said.
Calderon, who promised to make spending on roads, bridges, hospitals and sewage systems an engine for growth during his six- year term, increased government investment in such projects by 29 percent to 229.8 billion pesos ($16.6 billion) in the first nine months of 2008 from the previous year. The result: a 0.2 percent drop in construction activity from January to October.
“The headwinds facing the economy in 2009 appear to be so strong that probably the construction spending, if it takes place, won’t be able to offset them,” Arcentales said in an interview.
Calderon’s pledge to boost investment from government and private-sector partnerships by 7.5 percent this year may at best keep the industry from declining and adding to the country’s 4.5 percent unemployment rate, the highest since at least 2000, said Gabriel Casillas, an economist with UBS AG in Mexico City. The economy will likely contract 2 percent this year, he said.
“We’re going to see the government doing more public investment, but that’s only going to compensate for the drop in private construction,” Casillas said.
Lending ‘Paralyzed’
Private building and housing, which make up about two-thirds of construction activity in Mexico, are expected to decline this year on lack of credit and slack demand. The postponement last week of a government-backed $4.88 billion port project at the west coast town of Punta Colonet dealt a blow to Calderon’s strategy for public- private partnerships to drive construction in Mexico.
“We have a full-fledged credit crunch going on in Mexico,” said Edgar Amador, strategy director for the Mexican unit of Paris-and Brussels-based Dexia SA, the world’s largest lender to local governments. “My bank and everybody else’s bank are just paralyzed.”
Dexia made 22 billion pesos of loans to Mexican state and local governments for infrastructure projects in the last three years. The bank was looking at more than a dozen projects to finance, including highways, waste-water treatment and railroads before the September credit crunch hit.
“We had to kill them all,” Amador said. “We’re sitting on the sidelines now.”
Limited Impact
The number of construction workers registered with Mexico’s social security system declined to 1.01 million in December from 1.24 million in September, according to the Mexican Social Security Institute.
Construction projects, which can take months to get started, aren’t the best way to stimulate an economy quickly, Arcentales said. The industry is three times smaller than manufacturing and makes up only 6 percent of the Mexican economy, limiting its impact, he said.
“If you tell me you’re going to build a refinery, which is a multiyear project, it’s probably the right thing to do,” Arcentales said. “In terms of stimulating economic activity immediately, it’s just not there.”
Obama’s Plan
Alfredo Coutino, a senior economist for Latin America at Moody’s Economy.com in West Chester, Pennsylvania, said that most governments, including the U.S., face delays in getting projects out to bid.
“Mexico is not a unique case in that sense,” Coutino said.
In the U.S., Democrats in the House of Representatives are proposing to spend $30 billion on highway construction and $10 billion on transit and rail projects over two years as part of an $825 billion stimulus package. Lawmakers are planning to have legislation ready for President-elect Barack Obama to sign by Feb. 14. Obama will we sworn in tomorrow.
Calderon, who took office Dec. 1, 2006, still is betting on construction to stimulate the Mexican economy. On Jan. 7, he announced plans for record public-private investment of 570 billion pesos this year.
Humberto Armenta, president of the Mexican Construction Industry Chamber, forecasts construction will only increase as much as 1 percent in 2009 as private projects and home building struggle.
Private construction may pick up in the second half of this year as banks and foreign investors begin to lend again, Armenta said.
Too Timid
“Once the global risk capital begins to move, Mexico will be a prime destination,” he said in a telephone interview.
Fernandez, the owner of Juarez-based company Constructora Electrica Fer SA, hopes to win government work and keep sales from sinking further. Fernandez employs 50 workers to provide lighting for shopping centers and hospitals and had sales of $5 million in 2007.
“The situation is very difficult,” Fernandez said.
Bigger contractors also are looking to the government to help weather the recession. Empresas ICA, Mexico’s largest construction company, forecast revenue will rise as much as 30 percent this year from an estimated 29 billion pesos in 2008.
Amador of Dexia bank doesn’t share ICA’s optimism on Calderon’s spending plan.
“You need a serious package here, something massive to keep the economy out of the doghouse,” Amador said. “I think they’re being very timid.”
Source: Bloomberg, Thomas Black in Monterrey, Mexico, at tblack@bloomberg.net, 19.01.2009
Filed under: Mexico, News, Bailout Lesson, Black Swan, Economic Crisis, Financial Crisis, Mexico, President Obama, US Financial Meltdown, USA
