Puerto Vallarta Weather Report
Welcome to Puerto Vallarta's liveliest website!
Contact UsSearch
Why Vallarta?Vallarta WeddingsRestaurantsWeatherPhoto GalleriesToday's EventsMaps
Sign up NOW!

Free Newsletter!

Puerto Vallarta News NetworkMexico & Banderas Bay Area News 

Pena Nieto Reforms Boost Mexico Consumer Spending

go to original
February 15, 2013

Although many Mexicans shop below the tax man's radar at street markets, the rapid growth of US retail giant Wal-Mart's local arm, Walmex, over the last 20 years suggests a healthy outlook for consumption.

Mexico City, Mexico - Mexico's ambitious agenda of economic reforms could unleash pent-up spending by low and middle-income earners if the economy gathers steam and more on-the-books employment gives workers easier access to credit.

A recently approved overhaul of rigid labor rules and planned changes to tax, energy, and antitrust laws by President Enrique Pena Nieto are aimed at helping create jobs and reduce the size of the underground economy, starting a virtuous cycle of greater investment, employment, and lending.

The reforms aim to boost labor productivity, which has gone backwards in recent years, and lift growth to 6 percent a year, about three times the average of the last decade.

In Brazil, a decade-long boom lifted over 30 million people into the middle class, driving demand for locally-made and imported consumer goods and fueling growth further but also creating a dangerous credit overhang.

Pena Nieto, who took office December 1st for a six-year term, has also pledged to improve the country's social security safety net, including state pensions and unemployment benefits. That would make a huge difference to the 50 percent of Mexicans who are considered poor.

"Today we add up the things we need to pay for and we just can't afford them," said Ernesto Rodriguez, who makes about $180 pesos, or about $14, a day as an office assistant and shoe shiner in Mexico City. "But perhaps this will change if the economy improves, and we hope it does. I think we already hit the bottom."

Household spending accounts for roughly 60 percent of Mexico's economic output and private consumption has moved in line with economic growth over the past decade. Growth of 6 percent a year rather than the 4 percent expected in 2012 should boost household spending by $10-$15 billion a year, excluding housing costs, according to Thomson Reuters calculations.

With a population of more than 110 million, that amounts to $120 per capita in shopping for each year of annual growth above 4 percent, on top of the $5,600 Mexicans currently spend, excluding housing costs.

A monthly confidence survey shows optimism about the outlook for household finances in 12 months time is the highest in five years.

Although many Mexicans shop below the tax man's radar at street markets, the rapid growth of US retail giant Wal-Mart's local arm, Walmex, over the last 20 years suggests a healthy outlook for consumption.

Growth and Credit

To buy more, Mexicans need more spending power: either through credit, which is not part of the national culture as it is in peers such as Brazil and Chile, or through higher wages, or both. Mexico's minimum wage is less than half Brazil's and has risen just 1 percent more than inflation since 2001, to around $5 a day.

A sustained rise in salaries was one of the biggest drivers of consumer spending in Brazil over the past decade. Average wages have risen over 30 percent more than inflation since 2005, and the minimum salary is indexed to GDP by law until 2015 - ensuring real gains of 7.5 percent in 2012 alone.

While that helped create a much larger middle class, the automatic salary rises are partly blamed for Brazil's sticky inflation and for its uncompetitive manufacturers - an example which Mexico, with its more open and trade-dependent economy, will probably avoid.

"You can't raise salaries by decree," said Sergio Luna, an economist at Citigroup. "I mean, you can do it, but it will end in tears, sooner or later."

For firms to afford higher salaries, economists say the reforms must succeed in improving productivity, which has gone backwards over the last decade and kept per capita income growth at half the level of Chile.

Demographics are in Mexico's favor: about half the population is younger than 25, compared with 42 percent in Brazil. Stricter immigration rules in the United States are keeping many of Mexico's most productive individuals in their home country, said Manuel Molano, deputy director at the Mexican Institute of Competitiveness. Labor reforms approved last year have already made hiring and firing easier. Combined with the planned social security overhaul, the changes should help companies lure in some of Mexico's 14 million workers who currently operate off the books, according to the national statistics institute - although some are skeptical about the prospects of much progress on this front.

Diego Elizarraras, president of the Mexican Franchising Association, says he expects the sector, which generates over $6 billion in annual sales, to create 800,000 formal jobs over the next six years as small entrepreneurs heat up competition against street vendors. More on-the-books jobs should also make it easier for Mexicans to get bank loans and credit - if they want to.

Pena Nieto's government also expects to approve a tax reform and an overhaul in the energy sector later this year. The reforms are supported by Mexico's three main parties.

Only one in four Mexicans have a bank account in a country with about 24 million credit cards - or one for every 4.7 people, though affluent Mexicans can have more than one card. That compares to one per 2 in Brazil. Although consumer credit grew 15 percent in 2012, it is less than half the level of Brazil at 5 percent of GDP.

The Mexican Auto Industry Association estimates that if planned measures to strengthen foreclosure procedures are introduced and more consumers gradually gain access to banking loans, annual car sales would rise nearly 60 percent to 1.6 million vehicles in the next six years. If Mexicans borrowed to the same extent as Brazilians, it would free up over $40 billion in spending - although this also carries risks.

Comparatively low credit in Mexico has meant loan delinquency rates are lower than Latin American peers and about one-third below Brazil, where record-high bad loans are now undermining government efforts to boost economic growth and excess credit can fuel asset price bubbles.

Salesman Javier Arias says his life has improved recently, which allowed him to buy a flat-screen TV. But he doesn't have a bank account and is wary of taking out a loan. "If I wanted to buy a car, I would save the money first," said the 48-old Arias.