October 30, 2018 / 8:49 PM / 17 days ago

Mexico central bank pick says new government's plans pose growth risks

MEXICO CITY (Reuters) - President-elect Andres Manuel Lopez Obrador’s pick to join the Bank of Mexico said the incoming government was making decisions that could slow economic growth and that it could be difficult to lower interest rates in Mexico next year.

Mexico's President-elect Andres Manuel Lopez Obrador talks to supporters as he continues with his tour to thank supporters for his victory in the July 1 election in Monterrey, Mexico October 19, 2018. REUTERS/Daniel Becerril

Jonathan Heath, an independent economist who Lopez Obrador has tapped as a future deputy governor at the central bank, said the new administration was facing a “extremely difficult” start.

In a column in Tuesday’s edition of Mexico’s Reforma newspaper, Heath said it would also be “extremely difficult” to lower interest rates in Mexico if the United States keeps raising borrowing costs.

The central bank’s benchmark rate is at a 9-1/2-year high, and Heath noted that tight monetary conditions, scant room to boost the budget and an expected exodus of experienced officials due to pay cuts planned by Lopez Obrador would inhibit growth.

“The new government is not helping. It is seeking to complicate an already very complicated scenario,” Heath wrote.

“The private sector is watching, investing in dribs and drabs in the face of aggressive and unencouraging changes in the rules of the game,” he said, noting that growth nearly always slowed in the first year of new Mexican governments.

“Things now point to an even greater slowdown,” he added.

Heath, who will need to be approved by the Senate, was named last month to replace outgoing board member Manuel Ramos Francia, whose term lasts through December.

Heath said Monday’s announcement that a partly-built $13 billion new airport for Mexico City was to be cancelled would “throw into the trash an enormous quantity of funds already invested” and add to budgetary pressures.

Lopez Obrador’s decision to cancel the airport set him against the business elite and raised concerns he could deviate from orthodox fiscal policies once he takes office in December, sending Mexican financial markets down sharply on Monday.

The cancellation would generate costs to pay out contracts already awarded, and would require more government money to complete Lopez Obrador’s alternative plan to convert a military air base for commercial use and upgrade existing airports, Heath argued.

Lopez Obrador’s plan to cut crude exports and increase refining, while lowering gasoline taxes, would crimp tax revenue from state-run oil company Pemex, while a move to lower taxes in border states would further limit government income, he noted.

Heath said Lopez Obrador’s policy mix would translate into less government spending and a “negative impact” on growth during his first year in office.

Reporting by Michael O'Boyle; Editing by Dave Graham and Tom Brown

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