To BNP, Mexico Is Too Optimistic on Growth as Debt Balloons

  • Economy to grow 1.5% in 2017, below government forecast: BNP
  • Tepid expansion may hurt push to trim debt, avoid downgrade

Mexico’s economic projections are way too rosy for BNP Paribas SA.

Marcelo Carvalho, an economist at the bank, says Mexico will grow by just 1.5 percent in 2017, the weakest in five years. It’s well below growth of as much as 3 percent forecast in a budget approved by lawmakers last week.

Carvalho isn’t alone. Economists at Barclays Plc to Nomura Holdings Inc. are concerned that Mexico’s longer-term growth estimates may also be unrealistic, threatening to undermine the government’s pledge to stem a debt spiral. S&P Global Ratings and Moody’s Investors Service have already placed their credit ratings for Mexico on negative watch, citing rising indebtedness.

“A combination of slower growth, higher interest rates, and fiscal disappointment is not good for the debt dynamics and could increase chances of a rating downgrade,” said BNP’s Carvalho.

Mexico, which has raised interest rates by 1.5 percentage point in 2016, has repeatedly cut its growth forecasts over the past few years as slumping oil prices sap tax revenue.

The government says Latin America’s second-biggest economy may expand as much as 5 percent by 2021, which will help Mexico reduce its debt as percentage of gross domestic product to 48 percent. This year, debt will equal 50.5 percent of GDP.

“They’re too optimistic,” said Marco Oviedo, an economist at Barclays.

Manuel Sanchez, the central bank’s deputy head, said Oct. 21 that the economy faces risks from a global slowdown and difficulties in adequately implementing economic reforms. Analysts in a monthly Bloomberg survey have lowered their median growth forecast for next year to 2.3 percent from 2.5 percent.

“The danger is that the notion that Mexico can have temporary increases in debt because it will pay the debt in the future with higher growth may not materialize,” said Benito Berber, a Latin America economist at Nomura. “The danger is that those temporary increases in debt will become permanent. In other words, that debt-to-GDP won’t stabilize.”

The peso weakened 0.7 percent to 18.9806 per dollar as of 2:32 p.m. in New York.

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