Porfirio Diaz’s lament has never sounded more appropriate. “Poor Mexico, so far from God, so close to the United States”. The former Mexican president held office seven times over five decades from 1876 to 1911. But one could be forgiven for thinking the comment much fresher.
Indeed, if you wanted a worrisome headline on emerging markets this year, Mexico has had you pretty well covered. There were questions over the implications of the new administration in the US, which had campaigned on ad hominem attacks on Mexicans, among other targets. Uncertainty still lingers over the trade agreement under which Mexico exports $36m of goods every hour. And in recent weeks, a series of natural disasters has killed people and destroyed infrastructure. Mexico has had it all.
And yet José Antonio Meade Kuribreña has his eye squarely on two core goals for the next nine months. One is to keep fiscal consolidation on track. The other, to support the country’s reforms effort.
“If we are able to do both, I think we’re going to have a good platform for growth going forwards,” Mexico’s secretary of finance tells Global Markets. “And we’re going to have that platform consistent with the sound, stable and sustainable policy measures.”
The twin goals of fiscal consolidation and the reforms endeavour go to the heart of what economists and analysts see as the keys to unlocking stronger growth in Mexico for the future.
The economy has expanded much more slowly than those of its big Latin American counterparts in the past 20 years, and, at below 3%, has closely mirrored the growth rates of its peers to the north. That reflects low average labour productivity, largely a result of a persistent informal sector, according to Moody’s.
Meade, who returned to the role of finance secretary last year after four years heading up other government departments, is fully committed to liberalising the economy.
“We need to continue implementing reforms,” says Meade. “Those have proved useful in providing Mexico with alternative sources of growth in the face not only of a lot of uncertainty but a lot of structural challenges, especially in the case of energy. So I think we need to continue to work in making sure that the reforms are well embedded in the Mexican economy, so that we start to get the dual benefits of a more flexible, resilient and modern economy.”
At the same time as it overhauls the structure of the economy, Mexico is cutting spending. That has helped it defend its A3/BBB+/BBB+ credit rating and underscored the administration’s commitment to following through on its promises.
Meade is equally certain that the government will keep up the fiscal consolidation project with planned budget cuts next year, even as the national election looms in July. “We’re very committed, even in the face of an electoral year, to do what’s right in terms of maintaining sound fiscal policies in order to maintain a commitment in terms of the fiscal consolidation programme that we have put forward.”
After particularly deep budget cuts in the past two years, the toughest part is over, he adds. “Compared to the effort that we had to do in order to get here in our last project and the one before that one, the effort that we have to do in this project is I think small in comparison.”
To help the fiscal consolidation, Mexico has adopted a policy of hedging the oil price. That gives a floor price to exports of the commodity, and offers some certainty when it comes to forecasting revenues for the year ahead. The hedge paid out in 2015 and 2016, supporting the economic package, Meade says. This year, the $42 price hedge is likely to be lower than the average market price. But given the volatility in oil prices, “we were very comfortable that we had it”, says Meade.
The Nafta question
Despite the commitment to Enrique Peña Nieto’s long-term agenda for reform and fiscal tightening, Meade cannot escape the fact that it has been a bumpy road this year. Traders dumped the country’s currency a year ago when Donald Trump won the US election. The peso’s pounding was a reaction to Trump’s direct antagonism of Mexico on the campaign trail. But it was also a proxy for more generalised worries about the fate of global emerging markets amid a more protectionist world order.
In the months that followed, it seemed that Trump’s barking tweets would be worse than any tangible bite that might come from the administration in the near term. The Mexican peso rebounded and growth estimates were revised back up. “As compared to beginning of the year, we’re looking at a better than expected performance,” says Meade of the country’s economic forecasts.
The biggest lingering uncertainty comes from risks around changes to the North American Free Trade Agreement, Nafta. Expectations have largely faded that the deal will be scrapped altogether, even though Donald Trump reiterated his hope to that effect just this week in an interview with Forbes. Ultimately, the number of US businesses that benefit from the agreement make a complete withdrawal unlikely, analysts say.
But changes are in the works. Canadian, Mexican and US trade officials met this week for a fourth round of talks to update the 23-year old deal. The discussions offer an opportunity to modernise the agreement, argues Meade. That could make the deal more relevant, and the participating economies more dynamic and competitive, he says.
“If you look at some of the numbers that have been analysed, clearly there is scope for us to do better in terms of finding a better integration process in the North American region.
“Many of the things that we now trade between Mexico, the US and Canada, many of the sectors that explain the dynamism of the North American region were not there, or were not open, or were not part of the agreement,” he says. “That means that we’re getting a lot of integration that’s outside the scope of Nafta. So if we can find ways to make sure that the integration process works through that agreement, I think that would be positive for all three nations and I think there’s scope for doing it.”
A mutually beneficial modernisation of the treaty should be the “central scenario”, maintains Meade when pushed on whether he is optimistic about the outcome of negotiations.
“There’s a case to be made for the way that the three economies work together and generate synergies that will complement each other from a demographic perspective,” he says.
Meade points to energy as a potential area for a win-win outcome. “We can take better advantage of the fact that our energy matrixes are different. We can take advantage of the fact that through our reforms we can trade energy more freely. So I think that there’s lots of scope for us to do better than we’re doing now.”
Dealing with disaster
Mexico has also had a tough run this year of natural disasters, being hit by both earthquakes and hurricanes. Meade is confident that the country has strong financial protection for such events. In addition to coverage through the capital markets in the form of catastrophe bonds, Meade notes that much of the public infrastructure is insured, and excesses are also covered.
“The fact that we had this multi layered approach where we put into place physical insurance, excess loss insurance, and the cat bond — by accessing both the debt market and the insurance market — that provides us flexibility and that provides protection from a public finance perspective in terms of Mexico being able to solve these challenges that have hit us so hard.”
Additionally, Meade is adamant that the companies will not need any public assistance to meet their obligations.
“Without a doubt. We’ve had several meetings with them. They are well regulated, well capitalized, they have very good practices they have access to the reinsurance market globally,” he says. “So both from the adequacy of the reserves to the adequacy of their practices, we’re absolutely confident that the insurance sector is going to be able to adjust into this process. Without it being a challenge on their solvency — or even a challenge to their liquidity.”
Election in view
Meanwhile, Mexican political actors are jostling for their positions to start the country’s presidential race. Meade himself is being discussed as a potential candidate for the governing Institutional Revolutionary Party, PRI. Meade first worked in government in 1991, as an analyst on the privatisation of Banamex. He has held ministerial roles since 2011, when he was appointed as energy secretary. Subsequently he has managed the foreign relations and social development portfolios.
He will not be drawn on the speculations. “I think the time is not there yet. At this stage I’m very focused on working with congress to get the economic package approved.”
It is a very diplomatic answer. Meade doesn’t miss a beat. “That’s what I do,” he says.