MEXICO: LatAm's Mint – a breath of fresh air

The past five years in Latin America have been all about Brazil. The next five could well be all about Mexico

  • By Elliot Wilson
  • 29 Mar 2014
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Mexico, for so long the nearly-man of Latin America, is finally enjoying its day in the sun. The world’s 14th-largest economy is set to grow by up to 4% in 2014, according to a February forecast from the Bank of Mexico.

Inflation has been tempered, with the central bank, which kept its overnight interest rate unchanged at 3.5% at a policy meeting in January, tipping prices to rise by no more than 4% this year. And in January, the economist Jim O’Neill, who in 2001 coined the term ‘Bric’, pooling together the emerging giants like Brazil and China, identified a second tier of rising stars, the ‘Mint’ countries, including Mexico.

Moreover, this is a nation on a stability kick. Politicians across all leading parties are working in harmony to implement a host of reforms spanning energy, telecommunications and education.

Global investors clearly see Mexico in a different light to other major emerging economies, many struggling with fund outflows, waning growth, and currency fluctuations. “The peso has become a pretty attractive currency to hold,” notes Jorge Mariscal, chief investment officer of emerging markets, and wealth management at UBS in New York.

It’s hard indeed to find many analysts with misgivings about Mexico’s future. This after all is a nation tipped by HSBC in 2012 to be the world’s eighth largest economy by 2050, a shade behind Brazil and ahead of France and South Korea. Reports by Goldman Sachs and PricewaterhouseCoopers tip it to be the world’s fifth and seventh largest economy respectively by mid-century.

“Mexico is the coming story over the next decade,” says Miguel Kiguel, director of EconViews, an influential pan-regional economic consultancy based in Buenos Aires. “It’s one of the most dynamic countries in the region, it’s benefiting from the US recovery, and the government is rapidly deregulating key industries. If I had to choose to be anywhere in Latin America over the next five to 10 years, I would have to say that place would be Mexico.”


Yet for all the fevered excitement surrounding the renascent economy (at least some of which can be explained by Brazil’s recent dip in form, and a concomitant desire among some investors to shift allegiance to a new regional sovereign star), it’s easy to overlook what is after all a fairly rapid turnaround in fortunes.

Gross domestic product (GDP) likely only grew by 1.2% in 2013, according to the central bank. In a February 2014 report titled Latin America: the long road, Credit Suisse noted that GDP growth averaged just 2.5% between 1995 and 2012, against a regional average of 3.8%. Average annual per capita GDP rose by less than 1% in Mexico in the first decade of the new century, against a regional average of 2.2%. The report pointed to the same problems bedeviling Mexico since the sudden devaluation of the peso during the Tequila crisis of 1994, most notably an over-dependence on the US, a febrile economy reliant on a few cyclical sectors and the glaring need for structural reform.

Each of these weaknesses is being systematically addressed. First, its lopsided relationship with the US. The past five years have been tough going for a country forced to look on as the likes of Brazil, Peru and Chile profited handsomely from the export of iron ore and foodstuffs to China. Mexico, notes Alonso Cervera, a managing director at Credit Suisse’s fixed income division in Mexico City, “didn’t benefit from the regional commodities boom the way [others] did. Rather, it was bound to the fortunes of the US economy, which buys four-fifths of its exports, primarily oil and manufactured goods.”

The bonds that bind the US with Mexico are crucial to both nations, but they can also be capricious. Typically, when the former does well, so does the latter; the reverse is also true, as was seen during the financial crisis. Yet recent years have, however, created some strange anomalies.

Rather than outpacing the resurgent US economy (which probably grew 1.9% in 2013), as would be expected at this stage of a mismatched co-dependent cycle, Mexico’s GDP growth has lagged. Neil Shearing, chief emerging markets economist at London-based Capital Economics, points to a number of “one-off weaknesses” undermining the Central American economy, including a sloughing construction sector, a series of poor harvests and the temporary shelving of key infrastructure projects. The country has also shown tentative signs of a slow-but-systematic long term decoupling from its larger, northern neighbour: in recent years, the US share of Mexico’s export bill has systematically slipped, albeit marginally, from 90% at the turn of the century to closer to 80% today.


Yet the power dynamic that holds both in place seems unlikely to be challenged in the near term. The sort of products in which Mexico specialises – trucks, car parts, consumer electronics – should benefit from rising US growth and consumer spending. Many US firms, slowly but surely, are reshoring, transferring mid-level manufacturing production back to North America as Chinese labour costs rise and as the Asian country moves up the production ladder.

All of which, as the US recovery gains momentum, should benefit production south of the Rio Grande. “Going forward, Mexico is very well positioned to benefit from stronger growth in the US,” says Cervera at Credit Suisse. “If you had to choose the US, Europe or Japan as your chief trading partner going forward, most people would choose the US.”

UBS’s Mariscal, who also sees the economy growing by up to 4% in 2014, adds: “As the US enters a new phase of its consumer recovery, and as US corporates deploy cash to productive investments, [that] should be a boon for Mexican manufacturing.”


Political leaders, working in harmony, are also seeking to add steel to a brittle economy by implementing long overdue and tough but necessary reforms. This push stems from the inauguration of president Enrique Peña Nieto in December 2012. From day one, his agenda, Credit Suisse noted in its February 2014 report, was directed at taking on “the structural issues previous presidents were unable to tackle”. Within days the three leading political parties, PRI, PAN and the PRD, had joined forces to create the Pacto Por Mexico, a plan to raise living standards and economic growth through liberalisation and deregulation. 

Nor was this just talk. The economically-geared coalition, backed by support from a majority of Mexicans, swiftly approved fiscal reforms to strengthen the public sector’s non-oil tax collections, and financial reforms to boost lending by commercial and development banks. Other, sector-focused changes aimed to inject momentum into education (by introducing more and better teachers), telecommunications and media (by boosting anti-trust powers and spurring competition) and energy (by opening up a stodgy state industry to private sector participation).


The latter industry is critical to the entire process. Energy reforms approved by Congress in December 2013, noted Credit Suisse in its February report, “represent the most important structural change for the Mexican economy since the signing of the North American Free Trade Agreement in 1993”. Private sector interests will be permitted to bid for oil drilling, services and distribution contracts, with electricity generation opened up to private and foreign investors.

“These reforms,” Credit Suisse wrote, drawing on predictions from the Ministry of Finance and the Bank of Mexico, could “in the next few years” add as much as two percentage points to economic output, boosting annual GDP growth “from 3% to 5%”. Capital Economics’ Shearing compares

Mexico’s reforms to those of Colombia’s, which saw economic output surge after opening its oil sector to private and foreign capital.

In many ways, though, approving a bundle of ground-breaking primary legislation is the easy bit. Now comes the harder part of the equation: making all those reforms stick. Mexico, notes UBS’s Mariscal, “is now at the difficult stage of ensuring that recent reforms take effect, and ensuring that these changes are wedded successfully with the current institutional framework”. Much will depend on how fast and how effectively Congress can enact specific laws.

So far, the outlook isn’t great. Secondary laws on energy, originally slated for approval by end-March 2014, now look set to be implemented in the fourth quarter. “Whether Congress delivers on [its] timeframe remains to be seen,” adds Marisal, who notes that most secondary laws are arriving “behind schedule”. Adds Nur Cristiani, Mexico equity strategist at JP Morgan in Mexico: “As negotiations are pending, there’s always the risk that the reality will fall short of expectation.”


In many ways, this is just the start of a very long journey. Mexico has done well since the Tequila crisis to create a stable and sturdy economy that rather lacks exuberance. Primary reforms are a big step toward liberalisation, deregulation and the creation of a modern economy recognisable to global investors.

Those very investors, notably blue chip corporates and fund managers, need to believe that Mexico has changed, becoming a more worldly as well as a safer place to live. The country “needs to toughen further the rule of law, reduce corruption, improve guidelines on transparency, and continue to boost competition across the economy,” notes UBS’ Mariscal. Adds Credit Suisse’s Cervera: “Foreign corporates need to feel safe when they send white-collar executives and their families here.”

But Mexico’s future, for now, seems rosy. It’s an economy on the rise, benefiting from the US recovery and, over time, from a deregulation spree. It boasts the world’s fourth-largest shale reserves, a construction sector slowly clambering out of recession and, in education, healthcare and oil services, several burgeoning industries increasingly dominated by private sector players.

Nor would many trade Mexico’s current position with that of, say, Brazil, flirting with technical recession, or Argentina, paralysed again by inflation and weak governance. “The past five years in Latin America have been all about Brazil,” adds Cervera. “But in the next five years, global media coverage of Mexico will likely improve greatly, probably at the expense of Brazil’s.”

  • By Elliot Wilson
  • 29 Mar 2014

All International Bonds

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • 14 Aug 2017
1 Citi 277,535.88 1017 9.04%
2 JPMorgan 248,534.46 1144 8.10%
3 Bank of America Merrill Lynch 241,815.62 851 7.88%
4 Goldman Sachs 183,141.94 602 5.97%
5 Barclays 180,728.08 692 5.89%

Bookrunners of All Syndicated Loans EMEA

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • 15 Aug 2017
1 HSBC 28,409.71 115 7.09%
2 Deutsche Bank 26,802.83 89 6.68%
3 Bank of America Merrill Lynch 24,896.88 69 6.21%
4 BNP Paribas 21,168.42 119 5.28%
5 Credit Agricole CIB 19,323.66 110 4.82%

Bookrunners of all EMEA ECM Issuance

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • 15 Aug 2017
1 JPMorgan 13,671.74 61 7.88%
2 Citi 12,076.06 76 6.96%
3 Morgan Stanley 11,895.38 66 6.86%
4 UBS 11,800.30 47 6.80%
5 Goldman Sachs 11,107.46 58 6.40%