August 29, 2019 / 2:53 PM / 4 months ago

Mexico central bank highlights domestic risks to weak economy

MEXICO CITY (Reuters) - The Bank of Mexico said on Thursday that Mexico, Latin America’s second-largest economy, is facing a slew of headwinds, including stagnant private investment, weak domestic demand and persistent risks to the health of state oil firm Pemex.

FILE PHOTO: The logo of Mexico's Central Bank (Banco de Mexico) is seen at its building in downtown Mexico City, Mexico February 28, 2019. REUTERS/Daniel Becerril

Known as Banxico, the central bank said economic stagnation reflected weakness in most areas of aggregate demand, especially a slowdown in consumption and lackluster investment, minutes of the Aug. 15 monetary policy meeting showed.

Mexico’s economy posted no growth in the second quarter, edging uncomfortably close to entering a recession in the first half of 2019, and underlining the economic challenge facing President Andres Manuel Lopez Obrador.

The grim outlook and slowing inflation helped prompt the bank to cut its main lending rate by 25 basis points to 8.0% this month, the first reduction since June 2014.

Veteran deputy governor Javier Guzman was the sole board member who voted to hold Banxico’s benchmark interest rate steady at 8.25% at that meeting, the minutes showed.

The surprise move by Mexican policymakers followed rate cuts by central banks around the world as a trade-induced slowdown showed more signs of stymieing global growth.

“Most members highlighted the persistence of an environment of uncertainty that has affected private investment, and which has stemmed from the public policy decisions taken by the new administration and by concerns over insecurity and corruption,” the minutes said.

Some of the decisions made by Lopez Obrador, a leftist exponent of economic nationalism, have shaken investor confidence in Mexico, dampening hopes for growth.

Banxico on Wednesday slashed its economic outlook for this year to forecast virtually no growth, citing slack conditions that will persist for longer than expected.

The minutes underscored concerns posed by the uncertainty surrounding the credit rating outlook for state oil firm Petroleos Mexicanos, or Pemex, and Mexico’s sovereign debt.

Mexico in July unveiled a keenly awaited business plan meant to bring Pemex, the world’s most-indebted oil company, back from the brink. However its promises to provide government support failed to dispel worries of a ratings downgrade.

“Most members agreed that Pemex’s situation is still a risk factor. They stated that Pemex’s business plan announced in mid-July has failed to reestablish confidence in its financial outlook due to doubts regarding the viability of increasing crude oil production,” the minutes said.

Reporting by Anthony Esposito; Editing by Dave Graham and Andrea Ricci

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