By Alexandra Alper and Luis Rojas
MEXICO CITY, March 17 (Reuters) - After a rush of euphoria triggered by the promise of sweeping reforms to boost the Mexican economy, growth is failing to live up to expectations and small business owners like Enrique Paz are feeling the pinch.
A series of tax increases and a roll-back in fuel subsidies is denting consumption and it will likely be 2015 at the earliest before the economy starts to feel any boost from a landmark opening of the state-controlled energy sector.
Wrap in wobbly demand from top trade partner the United States and a flagging construction sector, and the Mexican government's 3.9 percent growth target for Latin America's second-biggest economy looks increasingly unrealistic.
The market is already dialing back estimates, with analysts polled by the central bank forecasting 3.2 percent growth.
"There are taxes on top of taxes. Buying power is down. The people don't have money to spend," said Paz, 44, who says sales at his kiosk in downtown Mexico City have fallen 40 percent as new levies forced him to raise prices on snacks and sodas.
President Enrique Pena Nieto forecasts his reform drive, which spans education to energy, will boost growth to around 5 to 6 percent. The policy overhaul has helped Mexico steal the limelight from the region's struggling No. 1 economy, Brazil.
But the government has so far failed to rev up growth, which averaged 2.4 percent in the decade before Pena Nieto took power in December 2012. The economy grew just 1.1 percent last year.
"The reforms have been oversold and on balance this year the effect ... will be neutral or slightly negative," said Rodolfo Navarrete, head of analysis at Vector, a brokerage that sees growth of just 2.3 percent this year.
Pena Nieto took office vowing to lift Mexico by ending state energy firm Pemex's oil and gas monopoly, improving a paltry tax take and creating more competition for corporate giants like Carlos Slim, who dominates Mexican telecoms.
Even before lawmakers had passed all of Pena Nieto's reforms, markets had endorsed him, bringing yields on government debt to record lows and the peso to a nearly two-year high.
Rating agencies followed suit, and Mexico became only the second country in Latin America to win a coveted "A" grade sovereign credit rating from Moody's Investors Service.
"This is a watershed moment for Mexico," fellow rating agency Standard & Poor's said, after Mexican lawmakers signed off on an energy overhaul the government says should add 1.1 percentage points to growth by 2019. But that is a long way off.
Data last month showed Mexico's economy slowed sharply in the fourth quarter as industry and services disappointed, dragging annual growth to a four-year low.
Many expect the finance ministry to begin cutting its projection this year as it did in 2013, when it slashed an initial forecast of 3.5 percent down to 1.3 percent.
Most pessimism stems from weak factory exports, which have fallen for five months in a row, as U.S. demand for Mexican manufactured goods was undermined by bad weather.
TURNING THE CORNER?
A rebound appears to be under way in the United States, the destination for nearly 80 percent of Mexican exports, as U.S. manufacturing growth accelerated in February. Also, Mexican factory output rose in January the most in over a year.
"This positive print must be taken with a pinch of salt," Nomura Securities economist Benito Berber said in a client note, pointing to a sagging construction sector.
Headwinds are also hitting consumption after Pena Nieto's reform to boost weak tax collections took effect in January.
The law raised income taxes on the wealthiest, cut fiscal benefits for companies and boosted levies on junk food and sodas.
"The economy's still not picking up as we expected," Daniel Servitje, chief executive of Mexican bakery group Grupo Bimbo, said on an earnings call. "The market ... was soft and it's still soft."
Fitch estimates that volumes at Mexican bottlers will fall by 5 to 7 percent and bottler Coca-Cola Femsa says it has boosted prices by 16 percent, citing the reform.
The tax increases have also fueled inflation, which surged above the central bank's tolerance ceiling to hit an eight month high in January. The number of formal jobs fell that same month.
Meanwhile, retail sales have also been weak, and consumer confidence was at four-year lows until a bounce in February.
"There is a generalized negative feeling in Mexico that contrasts dramatically with the very positive perception outside of Mexico," said Gerardo Rodriguez, a managing director at BlackRock and a former deputy finance minister.
The ministry argues the fiscal reform will add 0.1 percentage point to growth next year by bringing more workers into the formal sector and boosting their productivity.
The drop in consumption should also be offset by new government spending, thanks to non-oil fiscal revenues that rose 23 percent in January from a year ago, and a budget that allows the state to run a 1.5 percent deficit to underpin growth.
But some economists are skeptical about the offset, arguing that financing the deficit could require the government to take resources away from the private sector.
"It's unclear how this expansive fiscal policy is going to create the boost that the government says it will," said Jonathan Heath, a Mexican economist.
And the energy reform is unlikely to yield quick results.
Berber says it will raise foreign direct investment by about $10 billion annually - but not until at least 2016, a year beyond his prior estimate and the finance ministry's.
"Maybe it was wishful thinking to expect that investment would come in 2015," said Berber, who added that Colombia and Brazil only saw oil-related FDI begin to accelerate four and 12 years respectively after oil sector reforms were approved.
Finance Minister Luis Videgaray has taken pains not to fan hopes the reforms will boost growth in the next quarter. "It is a strategy to increase potential growth in the next years and the next decades," he told Mexican radio.
Some economists say investors are wise to be patient.
"Mexico has promised so much on the reform front, and yet we have yet to move convincingly from Mexico's disappointment to Mexico's moment," Morgan Stanley economist Gray Newman said in a client note. "I suspect the strength is still to come."
- Budget, Tax & Economy
- Politics & Government
- Pena Nieto
- Mexico City