If there were ever any proof of the need for structural economic reform in Mexico, you could do worse than to look at February’s retail sales, which came in far below expectations.

On Monday, the government’s statistics agency reported that sales were down 0.1 per cent in February compared with the previous month in seasonally adjusted terms, and a chilling 2.6 per cent down on figures for the same month last year. HSBC had predicted a 1 per cent increase, and Banamex, Citi’s Mexico arm, had expected a 0.5 per cent increase).

All in all, that is the worst year-on-year fall in more than three years. So what’s going on?

It might be tempting to explain things away by pointing to the 29 days that February had in 2012 compared with 28 this year. But that only takes you so far. The fact is that the figures are an undeniable sign that Mexico’s domestic economy is slowing down. Textiles and footwear fell 9.7 per cent, supermarkets and department stores fell 6.7 per cent, and food, drinks and tobacco fell 4 per cent. There’s no disguising those numbers.

While it is true that formal employment continues to grow as does consumer credit (and economists expect a much better second half of the year thanks to US growth and government spending in Mexico coming on line after the December handover), Mexico needs to be more dynamic.

There are still too many drags on domestic growth, including the lack of private-sector competition, investment in the energy sector and credit to the private sector. Bank credit is about 26 per cent of gross domestic product compared with roughly 60 per cent in Brazil and almost 100 per cent in Chile. Talk to any owner of a small- or medium-sized business, and the story is the same – they want to borrow money but they can’t.

All of this partly explains why Mexico’s informal sector remains persistently large, and why formal-sector wages remain persistently low. Indeed, a report out this month from Bank of America Merrill Lynch showed that wages in Mexico are now lower than in China.

The current administration is pushing hard for reform. In the most significant effort in decades, centrist President Enrique Peña Nieto has shown a determination to tackle several glaring problems. Thanks to support from his Institutional Revolutionary Party (PRI), the previous administration passed an important labour reform, which allows companies to outsource and to hire by the hour.

This week, Peña Nieto is expected to introduce a financial reform bill into congress with the idea of boosting credit. Among other things, the reform, which will likely come Tuesday, would create incentives for the country’s development banks to lend to small companies, make it easier for commercial banks to claim assets of companies that default, and lift the restrictions on foreign ownership of certain financial institutions.

As is, economists believe that retail sales growth will return in in the second half of the year and that GDP will expand 3.5 per cent in 2013. But without continual pressure on the reform front, Mexico will never turn into the Aztec tiger it dreams of becoming.

Related reading:
Mexico’s poverty conundrum, beyondbrics
Mexican labour: cheaper than China, beyondbrics
Mexico: next stop, a rating upgrade?, beyondbrics
Mexico: Aztec tiger, FT
Mexico special report 2013, FT

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