Yves here. Mexican president Obrador, known as AMLO, may be presiding over a borderline recession. Even though the economy has softened, he still is very popular. And I wonder if some of his fans would attribute the slowdown to a capital strike by those who feel most threatened by his reforms. Having said that, AMLO cancelled the Mexico City airport all on his own and he is also fiscally orthodox despite his leftie talk.
By Nick Corbishley. Originally published at Wolf Street.
Construction activity in Mexico registered its biggest year-on-year fall in May since records began, in 2006, according to a monthly survey of construction companies carried out by the National Institute of Statistics and Geography (INEGI). It was the fourth consecutive month of declining activity.
The total productive value of construction projects under development contracted 3.1% between April and May this year and 10.3% between May 2018 and May 2019. During the same 12-month period, the total hours worked in the sector fell by 5.2% and the total number of (official) workers employed fell by 4.9%, to the lowest level since records began.
The construction sector survey provides monthly estimates of the total value of construction work done on new structures or improvements to existing structures for both public and private sectors. The data it uses includes the cost of labor and materials, architectural and engineering work, overhead, interest and taxes paid during construction, as well as contractors’ profits.
The survey is meant to serve as a barometer of the overall health of Mexico’s construction sector. In recent months, the warning signs have begun to mount. Over the last year, activity in the sector contracted in ten months out of 12. There are two main reasons for this drop-off:
One, many private sector investors are afraid to invest. Since Mexico’s new government came into power in December, there has been much greater enforcement of laws, rules and regulations concerning construction, which has made life more difficult for companies in the sector. The bombastic style and more leftist policies of the new president, Andrés Manuel Lopez Obrador (AMLO for short), have fueled fears among investors that property laws could become less business friendly. Those fears are also being stoked by many of AMLO’s staunchest opponents. “The first year of a new government is always complicated and investors are always wary,” says Luis, the owner of a family construction firm in Puebla. “But this time, it’s more accentuated.”
Two, public sector projects have ground to a virtual standstill. Mexico saw a a 24% year-on-year drop in public sector projects in May, compared to a much milder 1.2% fall for private sector works. Construction of public sector buildings (e.g. schools, hospitals, public administration buildings, etc.) was down by 29.5% year-on-year in May while work on transportation and urban planning projects contracted by 62.8%.
This slowdown in public sector construction has been particularly pronounced in the capital, Mexico City, where almost 500 public and private development projects — over 40% of all the projects under way — have been halted or cancelled by the new city council over concerns that many developers were breaking, or at least bending, local laws and regulations. Also, far fewer permits are being issued for new projects.
“The new municipal authorities are responding much more proactively to public complaints about abuses being committed by real estate companies,” said Gabriela Alarcón, director of Desarrollador Confiable, an organization that promotes good practice in Mexico City’s real estate industry. “Those companies have faced more rigorous inspections, leading to the closure or suspension of almost 500 projects in the capital.”
The most important project to be halted was the construction of Mexico City’s massive new airport, which, until its cancellation in December last year, was Mexico’s biggest infrastructure project, with a total budget of around $13 billion. The controversial decision by Mexico’s new President to cancel the project, for a potpourri of financial, political and environmental reasons, hit construction companies hard, including Mexico’s richest man Carlos Slim’s Grupo Carso.
It also battered investor sentiment in the country, despite the fact that the government offered to repurchase the bonds that were issued abroad through the Mexico City Airport Trust Fund. Now, seven months on, investors, both foreign and domestic, remain wary.
There’s still no sign of construction beginning on AMLO’s alternative project to add two runways to a military air base in Santa Lucia (30 miles north of the capital) in order to supplement Mexico’s City’s long-standing Benito Juarez airport. Work is also stalled on AMLO’s multi-billion dollar Mayan Train project, which has attracted interest from big financial backers such as BlackRock and Bank of America but faces growing opposition from local residents, environmentalists and archaeologists.
This is all happening against the backdrop of a gradually worsening economic panorama. In the last nine months, banks, rating agencies and the IMF have all sharply revised downward their 2019 GDP forecasts for Mexico. This week the IMF slashed its forecast from 1.6% (made in April) to 0.9%.
In a note published on Wednesday, CitiBanamex estimated that Mexico’s economy contracted by 0.1% in the second quarter of the year (April – June), compared to the previous quarter. If true, that contraction, together with the 0.2% decline notched up in the first quarter of 2019, would be enough to tip Mexico’s economy into a technical recession.
Although the exact GDP figure for the second quarter will not be published until July 31, on Friday markets were treated to a potential foretaste in the form of INEGI’s seasonally adjusted Global Indicator of Economic Activity, which reported a 0.3% year-on-year fall in economic activity in May.
This downturn is happening as Mexico’s biggest export market, the U.S., grows at an annualized rate of just above 2%, suggesting that many, though not all, of Mexico’s economic woes are internal. “Older investors are particularly worried as they see echoes of former crises such as the devaluation of the early ’80s and the Tequila Crisis of the mid-’90s,” says Luis.
Analysts at Mexico’s largest domestic-owned lender Banorte warn that this “pervading lack of confidence” is already impacting “aggregate demand and consumption.” It also risks exacerbating the two main causes of the recent slowdown of Mexico’s construction industry, the suspension of works in Mexico City and the slow reactivation of investment projects in the private sector. By Nick Corbishley, for WOLF STREET.
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If there is one lesson from this (plus plenty of other examples) it is that it is impossible to reform from the left and be fiscally orthodox, unless you have the very good fortune to take power during a natural upswing in an economy, and even then it will only be a temporary success.
Interesting times in the UK then, if a reforming Corbyn government (and despite the caterwauling of a lot of people in the UK, some of whom should know better, it’s a pretty standard social democratic program) comes to power and wants to reform things in the wake of Brexit…
Indeed, although I think realistically he would have very little room to maneuver. The openness of the UK economy reduces the effectiveness of fiscal/MMT type policies and in no other country does the financial sector have such raw power and willingness to do damage if its in their interest.
God or money? Looks like Obrador is choosing god. Good for him and screw GDP.
The cancelled new airport was to be constructed on Lago Texcoco, Hydrologists have been documenting the subsidence occurring there and throughout Mexico City, as the area’s aquifers get drained.
Re: the cancelled airport:
“To support the structures it must bear, the muddy, unstable land had to be covered by a thick layer of tezontle––a type of red volcanic rock often used in construction projects in Mexico. An elaborate drainage system composed of gigantic pipes, tunnels, and canals is being simultaneously built, so the terminal and its runways can handle the severe rainfall and floods during the city’s wet season, between May and November. On top of everything, Texcoco is also where Mexico City’s stormwater naturally flows.
“In terms of feasibility, it’s just the worst terrain,” said Fernando Córdova, environmental impact specialist and a professor at the National Autonomous University of Mexico to Alto Nivel. “There’s a reason why this part of the city hasn’t ever been urbanized.”
Others have pointed out the severe environmental impact the project could have on the nearly 130 bird species found on the wetlands of Texcoco, and that it will worsen the ongoing water shortage crisis faced by the Mexican capital. NAICM, along with the adjacent industrial and commercial zone known as Aerotrópolis, is estimated to consume more than 23 million cubic meters of water each year. Authorities have warned that Mexico City will only have water for the next 50 years if the capital doesn’t lower its current consumption rates….”
https://www.citylab.com/transportation/2018/05/the-bumpy-take-off-of-mexico-citys-new-airport/559259/
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Apparently, corruption was also a factor, and that reminds me of flying on Mexicana (no longer in existence) from Mexico City to Tuxtla Gutierrez, Chiapas. The airport there was located in a narrow valley between mountain ranges and it was alternately prone to dense fog and strong crosswinds. On one of my flights, we got to Tuxtla, made two unsuccessful attempts to land in the fog, then returned to Mexico City. Apparently, that airport was on land that had belonged to one of the state’s governors, who had profited from the arrangement. A new airport was constructed in 2006.
Separately, as in the US and everywhere, imho, “development” and “construction” mean habitat loss and biodiversity loss.
Growing GDP with projects that run into large additional costs and results in a completed project on top of “muddy, unstable land” strikes me as a most curious project to continue. What kind of growth is built on “muddy, unstable land”?
What kind of growth is built on “muddy, unstable land”?
One with good (expensive) foundations. Foundations up to building code….Oh wait!
Much of San Francisco is built on landfill. Just dirt and other stuff dumped into the Bay. However building standards are better and usually followed. That is why earthquakes in some countries are ‘meh” while the same size quakes in other countries are horrific.
Growing GDP with projects that continue ecologically unsustainable practices on a finite world is a losers game of poker when mother nature holds all the aces and face cards
Some of that decline might also be in relation to the completion of rebuilding following the last big earthquake in Mexico City.
https://www.latimes.com/world/mexico-americas/la-fg-mexico-earthquake-economy-20170930-story.html
This post doesn’t quite add up. Is public sector construction such a large component of the Mexican economy that a 24% slowdown in public sector projects puts a big dent in the Mexican economy? Does a 24% slowdown in projects mean 24% less government spending on public sector projects flowing into the Mexican economy, and if so how big is that compared with the total government spending flowing into the Mexican economy?
How does the discussion of public sector construction relate to the “backdrop of a gradually worsening economic panorama”? Does a 24% slowdown in public sector construction projects explain how “In the last nine months, banks, rating agencies and the IMF have all sharply revised downward their 2019 GDP forecasts for Mexico”?
The concluding paragraph’s assertion: “Analysts at Mexico’s largest domestic-owned lender Banorte warn that this “pervading lack of confidence” is already impacting “aggregate demand and consumption.” Besides its skew of relevance to the previous discussion this explanation for events leaves a fishy smell. And what of the strange apology “suggesting that many, though not all, of Mexico’s economic woes are internal” — to which I suppose we should also read-in and so don’t blame the US.
If enforcing building codes is new, then most, if not all, current construction would be demolished and rebuilt.
That wound put a significant crimp in return on investment, and spike cost of construction.
Real estate developers facing stricter inspections has resulted in the cancellation of 500 projects in Mexico City? That sounds like a lot of dangerous buildings especially in a “subsiding” city. We need to hear more about Mexico because they are our neighbor. It would be nice for them to run their country successfully. The Mayan Train Project sounds interesting – why couldn’t it eventually run the length of North America? Hope AMLO doesn’t get sidelined too bad – he seems like the best president they’ve had. When capital has a temper tantrum and goes on strike it gets its way usually. But those easy opportunities to extract wealth from society are becoming fewer and fewer.
I had not heard of the Mayan Train Project. But there’s this from an initial foray:
“Construction of the Maya Train on the Yucatán peninsula poses environmental risks to the region’s underground water networks and the long-term survival of the jaguar, experts have warned.”
They’ve got those cenotes throughout Yucatan and Quintana Roo.
https://mexiconewsdaily.com/news/maya-train-project-poses-risks/
Big capital can chop even the mildest reformers down to size–discipline them–in very short order. And someone as ambivalent as Amlo, whom the Latin Left has little regard for to begin with.
On the rebound a disappointed working class can embrace fascism.
“Yves here. Mexican president Obrador, known as AMLO, may be presiding over a borderline recession. Even though the economy has softened, he still is very popular. And I wonder if some of his fans would attribute the slowdown to a capital strike by those who feel most threatened by his reforms. Having said that, AMLO cancelled the Mexico City airport all on his own and he is also fiscally orthodox despite his leftie talk.”
It’s amazing how wrong people are about Amlo. The media is incredibly hostile and the yellow journalism towards him is incredible.
I’ve been watching his morning talks with the media and it’s quite incredible how he bulldozer right through all the nonsense by hostile reporters. The outright lying by most of the so called “mexico watchers” is something to behold. The right wing media attacks him and he knocks them right back on their asses by pointing out their lies and how they never held the neoliberal governments to account. They want to attack him without any rebuttal. He tells them that democracy is respectful debate and he has a right to free speech, dissent, and the truth just like them.
The financial times have been attacking him nonstop and actually tried to get an interview while also trying to egg him on to attacking trump. He basically called them cheerleaders of neoliberalism that lack self criticism and should apologize to Mexico for the harm they shamelessly pushed.
https://www.youtube.com/watch?v=WFNonlglyNQ
He also completely owned Jorge Ramos when he tried to ambush him with his routine that Amlo is a dictator, corrupt, and is changing nothing. Jorge Ramos is a professional provocateur and his nonsense only works on people that aren’t prepared to rebut his “facts.” Jorge Ramos was mocked ruthlessly by the public and he hasn’t been back since Amlo can’t be provoked with fake news.
https://www.youtube.com/watch?v=_BMeALWoZno
Amlo is not stupid and he is quite aware that the neoliberal elite are trying to get him to fight with Trump. Amlo has no effective opposition in Mexico since they are all discredited. Trump active sabotage is the only thing that can derail Amlo’s plans for a transformation.
Amlo likes direct democracy and its not reported on but instead attacked as populism. It’s a shame that the filtering by the neoliberal and fake liberals is the only thing being reported.
Amlo asked the crowd if he should respond to Donald Trump’s taunts or if he should act with prudence. The crowd overwhelmingly voted for Amlo to ignore trump and to act with prudence.
https://www.youtube.com/watch?v=BxKv-Thqp3U
Amlo at another event noticed the crowd was unhappy when he was in La Laguna and booed the local officials and were silent when he talked about the Metrobus that was the focus of the gathering. He then decide to have a popular consultation right there and then and asked them if they wanted the metrobus, hospital or water improvements. They voted for water improvement and cheered like mad when he canceled the metrobus and said the money would now be used for water improvements.
https://www.youtube.com/watch?v=lM044BBnBQw
Amlo is not dumb or a fake liberal that only cares about first world problems. He tells the truth, listens to ordinary people’s concerns, and tries his best to not be drawn into conflicts.
In this video a group of protestors rushed his hotel when he was sleeping. He went out there and told them he has a right to rest and he does not deserve this type of political bs. He told them he always listen to the community but not like this and he isn’t dumb and know they were sent to keep him from sleeping. They denied it but retreated because they couldn’t come up with a good excuse for invading his hotel and waking him up.
https://www.youtube.com/watch?v=On7tIXgSVQQ
The reason that construction is grinding to a halt is due to massive Judicial resistance to most if not all of his projects. The judges installed by the previous neoliberal governments are handing out “amparos” to block any and all of Amlo’s changes that they feel they can get away with.
The new airport that was canceled is already flooding since it was built on a lake (pumps are required to keep it from flooding). The military base that is to be its replacement has hundreds of “amparos” preventing any construction from preceding.
Amlo has effectively stopped the theft of fuel from Pemex but you don’t hear about that. Amlo has stopped the looting of the CFE (state-owned electric utility ) but its not being reported by the traditional media. Social media is a force in Mexico and why his popularity can’t be dented by fake news. No one believes the media since they’ve cried wolf one too many times.
Right now i don’t see any reporting on the natural gas pipeline scandal in Mexico. TransCanada, Sempra Energy, and Grupo Carso (Carlos Slim) where robbing Mexico’s CFE with an incredibly corrupt pipeline contract. They built a natural gas line to Mexico paid for 100% by the CFE but it remains their property. They built it a year late and worse they are a bridge to nowhere (The natural gas power plants were never built) yet the CFE has to pay for gas even if there are no plants to burn it. The CFE is refusing to accept it and is trying to negotiate an end to the robbery without pissing off the US government that can retaliate overwhelmingly.
Amlo has a Youtube site and anyone can see why he’s so popular.
https://www.youtube.com/channel/UCxEgOKuI-n-WOJaNcisHvSg/videos
With all due respect, AMLO is fiscally orthodox, which is going to make it hard for him to do much. This is not the interpretation of the foreign press; this is based on his clear statements while campaigning as well as how he set his budget.
I’ve been watching his morning conference and tune in to his rural conferences when time permits. Its crazy how people are attacking Amlo for not being a radical and even for taking the foreign media as being accurate. Its incredible seeing the media’s distortion of what he says.
He’s been saying for years that Mexico’s problem is impunity, corruption, and lack of honest government. He’s repeatedly stated that Mexico needs to be prudent and self sufficient as possible without creating conflict. He’s been saying the government is not a business and that the robbing has to stop before anything can be accomplished.
His priorities have been clear for years. Honest government that doesn’t loot the population while living lives of luxury. Energy sovereignty as much as possible by building a new refinery after 40 years and rebuilding the existing ones. Food sovereignty as much as possible by investing in rural communities. Most important is the ending of the looting of the Mexican state and Mexican people by the elite since nothing can be accomplished by a bankrupt government.
Amlo is not dumb he knows that he cannot achieve anything with the active sabotaging of the US government. Nafta has made Mexico incredibly dependent on the US and while the US also is dependent the power differential is obvious to everyone. Amlo is not chavez or maduro and Mexico is not Cuba. Mexico is far larger but more dependent on the goodwill of the US.
The press is distorting the situation in Mexico, yet social media has broken their monopoly on the “truth.” Those with an internet connection or a smartphone can now directly tune in to Amlo’s Youtube channel where he streams all his conferences.
Amlo is an unstoppable force because he’s actually following through on his campaign to root out corruption and to invest in the poorest first. It’s obvious that the neoliberal elite are trying to sabotage him with lawfare and media defamation that are slowing but not stopping him.
He’s accomplished quite a bit in his 7 months of power but you don’t hear about it from the media. Stopping the bleeding from Pemex and the CFE is a huge accomplishment. The sabotage of 100+ billion dollars in debt is not something he can just wish away.
It’s crazy to see how Pemex and the CFE were being looted to privatize mexico’s energy sector. Amlo has stopped the bleeding yet he gets bashed for not being able to stop corruption and the violence in Mexico in a few months of him being in power. Amlo has been in power for 7 months yet people expect him to have already undone 30+ years of neoliberal rule.
Amlo is not a dictator and does not control the judicial branch that is actively sabotaging him with “amparos.” He’s been clear for years that he will not violate the constitution or any laws but will work nonstop to clean house. The judges don’t want to lose their gigantic salaries and assorted perks. They’ve been forcing the government to pay them plus interest. It’s shocking how Mexico’s constitution says no one can make more than the president yet there they are making 2-3 times what Amlo makes.
Amlo has stated very clearly that he will not devalue the peso because it’s just robbing the poorest of their ability to consume the necessities of life. He will not chase growth for the sake of growth. He wants sustainable growth that does not damage the surrounding communities. He’s stated, “hat’s the point of a mine if it depletes and posions the surrounding aquifers?
Fiscal orthodoxy is something that Amlo has no choice in. He only has so much space to maneuver since Mexico is not a sovereign monetary power. The huge debts that were run up during the neoliberal area cannot just be ignored since the value of the peso has to be protected. Mexico is import dependent and its why he has to create a surplus from government austerity to get the funds to invest in the refinery, train maya, rural infrastructure, etc.
It’s shocking how ignorant of Mexico’s situation people are. Mexico imports 50% of its gasoline and diesel from the US (that’s how bad the sabotage of Pemex has been). Mexico imports natural gas and most of its food needs come from the US. 70%+ of Mexico’s exports go to the US and 50% of its imports come from the US yet he’s supposed to challenge the US?
Nafta has devastated Mexico energy and food sovereignty and its why Amlo has no choice but to be a “fiscal orthodox”. Amlo is not dumb he knows that he cannot borrow money to pay for his programs. He has to accomplish it the hard way by stopping the bleeding from corruption while lowering government spending on excessive salaries and luxuries.
Insane how the article makes it seems that Investments are more important then stopping the bleeding from these predatory contracts.
https://www.bloomberg.com/news/articles/2019-07-09/gas-pipeline-tussle-casts-shadow-over-crucial-mexico-projects
Thank you. Your comments make more sense to me than the post did. But Yves is right “AMLO is fiscally orthodox, which is going to make it hard for him to do much.” He will need a little MMT religion to fight against getting squeezed by big money.