Mexico to Freeze Gasoline Prices, Boost Jobs Spending

Go to original article

Mexico will freeze the price of gasoline this year, cut electricity rates for some industries and expand unemployment benefits as part of a financial stimulus to help the nation weather the global financial crisis.

The government and industries will increase spending on infrastructure such as roads, airports and sea ports to 570 billion pesos ($42.4 billion) this year, President Felipe Calderon said today in Mexico City. The price of heating gas will be cut by 10 percent and frozen for the rest of the year.

Mexico faces a significant challenge this year as the worldwide economic crisis worsens, sapping demand for exports and threatening jobs, Calderon said. Recessions in the U.S., which buys 80 percent of Mexican goods shipped abroad, as well as Japan and Europe present a risk to Mexico’s economy.

“Mexico is not the exception,” the president said. “We are and will continue to live through a period of great difficulties in economic growth, investment and employment.”

The stimulus program announced today will also increase the amount of time the unemployed can receive health benefits, give aid to companies affected by the economic slowdown and allow the jobless to withdraw more money from their retirement accounts.

Economic Growth

The measures come as figures show Mexico’s economy is weakening. Gross domestic product may expand 1 percent at best this year and may not grow at all as a worldwide financial crisis takes its toll on the country, Economy Minister Gerardo Ruiz Mateos said in an interview with Bloomberg Television after Calderon’s speech. The government’s official growth forecast for this year is 1.8 percent.

Third-quarter economic growth of 1.6 percent was the lowest in five years. The country’s manufacturing index fell to a record low in December, the sixth straight month the index showed contraction. Mexican economists expect the economy to shrink by 0.1 percent in 2009 as demand for exports slump, according to the central bank’s most recent survey.

Miguel Messmacher, the Mexican Finance Ministry’s chief economist, said Calderon’s economic stimulus plan will add 120 billion pesos to the economy, or about 1 percent of gross domestic product.

The plan won’t increase the budget deficit for this year because it will draw from last year’s oil revenue, which was above the budgeted price, as well as from fiscal revenue, Messmacher told reporters in Mexico City. Excess oil revenue was about 100 billion pesos last year, he said.

Interest Rate

Calderon’s plan will reduce inflation and may have a “marginal” effect on economic growth, Gabriel Casillas, an economist at UBS AG in Mexico City, wrote in a note to clients. Slower inflation gives the bank room to cut the benchmark rate, he said.

“Banco de Mexico will have no excuse not to cut interest rates at its monthly monetary policy meeting to take place next week,” he said.

Mexico’s inflation rate, which jumped to 6.2 percent in November, is set to end 2008 above the central bank’s forecast of no more than 6 percent. The central bank kept its key lending rate unchanged at 8.25 percent for a third straight month in November. It targets inflation at 3 percent.

Gasoline, which can only be sold by state-owned Petroleos Mexicanos, rose 8.4 percent from a year earlier to 7.60 pesos a liter for regular unleaded in November. The Finance Ministry instituted price increases last year because gasoline in Mexico was cheaper than the rest of the world.

Gasoline Prices

Opposition lawmakers urged the government to go even further by lowering gasoline prices. Gasoline in Mexico is now almost 40 percent more expensive than in the U.S. after an almost 70 percent drop in oil prices since a high last year, Casillas said.

“Energy prices remain high compared with other economies in the world and that worries us,” Cesar Duarte Jaquez, head of the lower house of Congress, told reporters in Mexico City.

Last year, the peso posted its worst annual decline in more than a decade as the global financial crisis roiled the nation’s financial markets. The currency fell 0.5 percent to 13.4514 per U.S. dollar today.

The yield on the 10 percent bond due in December 2024 fell 16 basis points, or 0.16 percentage point, to 7.77 percent, the lowest since April 23.

Calderon set a goal last year of spending 2.5 trillion pesos in private and public money during his six-year term on infrastructure projects. He said today that he will expand a program that provides construction jobs for the unemployed, and the government will guarantee or provide as many as 65 billion pesos in loans for infrastructure projects this year.

Jobs

Jobless people will have access to at least 15 billion pesos in aid, Calderon said. The government will increase the amount of money it contributes to people’s retirement accounts, the unemployed will be able to extend their health care benefits and withdraw from retirement accounts earlier, he said.

The package will also require government agencies to award 20 percent of projects and spending to small- and medium-sized companies in Mexico.

The government will spend at least 2 billion pesos to help companies hurt by the crisis avoid firing workers when they lower production levels or temporarily shut down plants. Mexico’s automotive, electrical appliance and manufacturing industries will benefit from participating in the plan, Ruiz Mateos said in the interview.

The plan will ensure “that there aren’t layoffs, that workers can perform technical shutdowns knowing that when demand comes back they can return to the workplace with their contract rights intact,” Ruiz Mateos said.