Mexican Manufacturing Output Declines

December 16, 2015Mexicoby EW News Desk Team

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Mexico's industrial sector slid 0.1 percent in October, which fell below analyst expectations of 0.25 percent, and mining dropped 0.6 percent that same month, according to Reuters.  Slow oil production and low oil prices slammed Mexico, hurting President Pena Nieto's desire to ramp up energy production to improve the economy. Factory production grew 0.1 percent, with the utility sector expanding 0.6 percent, but construction yielded no growth.

High poverty rates and drug violence has tarnished Mexico's reputation, but not much attention has been given to a robust middle class and thriving manufacturing sector that ships goods throughout the Americas. Mexico has also benefited from the North American Free Trade Agreement (NAFTA), as many employers moved operations from the U.S. to Mexico.

Moreover, Mexico has traditionally been a popular investment sight for large firms because of the country's educated worker base and low property values. However, Mexico's manufacturing capacity is beginning to wane due to lower demand, and the energy sector is partly to blame. Oil prices dropped over 40 percent since the summer of 2014, placing energy-rich countries like Mexico in a bind as oil companies fail to yield sustainable profits.

Oil Downfall

Nieto had campaigned on a platform of attracting foreign investors by liberalizing state-run oil firm Pemex, but his aspirations will be dashed as long as the oil supply glut continues, combined with lower demand. With that, many Mexicans hold their oil in high regard more than other energy-bearing nations, viewing the commodity as something that must benefit the people and not foreign investors who may exploit the oil at the expense of the public.

The Mexican consciousness had this view ingrained to the point where Nieto had signed an amendment to the country's constitution allowing private investment in Pemex, the first time in over 70 years. Regardless of such an enormous accomplishment, the government will have to minimize oil's importance on the economy and diversify away from energy.

However, a low-priced oil market is the least of Mexico's worries, and even though a strong manufacturing base will prop up the economy, a variety of long-term issues will hamper progress, most notably corruption.

Systemic Corruption

The government cannot expand wealth and opportunities without addressing the enormous corruption permeating throughout the government. In 2014, Mexico was one of the most corrupt nations on the planet, notes Forbes. This stems from a variety of factors, such as a low tax base that fosters little accountability, and close ties between politicians and drug cartels.

Estimates are that over 100,000 people have been murdered since the drug war started in 2006. Such a high rate of violence and corruption will continue to hold back the economy, regardless of a sound manufacturing sector, and the impact of the world economy will further jeopardize stability within Mexico.

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