Construction industry has worst month since 2006, fourth month in a row of declines.

By Nick Corbishley, for 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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