A little over a year ago, Mexico was still struggling to shrug off the worst economic contraction it had experienced since 1932. The financial crisis in the US and then the ensuing global recession in 2009 had led to a brutal drop in exports, a drastic loss of jobs and a rapid drying up of bank loans.
Today, things could hardly look more different. Last year’s growth of 5.5% outstripped all expectations, exports are booming, companies are hiring workers again, and analysts are revising up their growth estimates for this year.
The mood is so positive that Sergio Martín, chief economist for Latin America at HSBC in Mexico, says: “Mexico is in a sweet spot right now.”
One of the things that has economists so upbeat about Latin America’s second-largest economy is that the recovery is happening in a context of relatively low inflation. According to the central bank’s February report, inflation over the past 12 months was just 3.57% compared with 3.78% in January.
The latest figure places Mexico’s inflation well within the bank’s target of 3%, with a one percentage-point margin on either side, meaning that policymakers are not under immediate pressure to raise rates.
Put all of this together, says Ernesto Cordero, Mexico’s finance minister, and the result is little short of an economic policymaker’s dream. “All the data we have points towards economic consolidation and sustained growth,” he tells Emerging Markets. “We think that 2011 is going to be a good year in terms of job creation...and we expect to be able to maintain growth.”
Mexico’s change of fortune already has analysts scrambling to push up their growth forecasts. In early January, Banamex, Citigroup’s Mexican subsidiary, said it expected growth in 2011 to be 4.8% compared with its previous estimate of 3.9%. If it is right, by the end of this year Mexico’s economy will be the largest it has ever been.
REGIONAL LAGGARD
But how long can all of this last? After all, Mexico in recent years has been something of a laggard compared with the rest of the continent. Average annual growth since 2000 has barely topped 2%. By contrast, the Brazilian economy has expanded at more than 3% during the same period.
Many Mexico watchers argue that the reason for that unimpressive performance – the average growth of Latin America and the Caribbean during the same period is about 3% – is due to a series of structural bottlenecks that the country’s political class has either been incapable of solving or unwilling to touch.
One of them is the oil sector. With an average daily production of about 2.6 million barrels, Mexico is the world’s sixth- largest oil producer. Yet production has fallen 23.5% since 2004. Pemex, the state oil monopoly, lacks the funds and the know-how to explore in the deep waters of the Gulf of Mexico, where most of the country’s reserves are thought to lie.
At the same time, restrictive laws prohibit the company from entering into joint ventures with other oil companies as a way of sharing the risks associated with exploration and also gaining the experience and expertise required for such exploration. The result has been a sharp fall-off in production as well as a drop in Mexico’s proven reserves.
A second, related bottleneck is Mexico’s fiscal framework.
At roughly 11% of gross domestic product, the government’s non-oil related tax take is one of the lowest in Latin America – only Haiti and Guatemala have similarly weak public finances. And economists such as Ernesto Cervera of economic consultancy GEA in Mexico City say the resulting low public-sector investment leaves the country at a permanent disadvantage compared with other regional leaders such as Brazil or Chile.
As if those two problems weren’t enough, Mexico now faces a third challenge: security. Since the centre-right president Felipe Calderón took office in December 2006, the government has placed combatting organized crime, in particular the drug cartels, at the top of its list of priorities.
Yet in spite of some success – Calderón’s administration has either captured or killed 20 of a list of the country’s 37 most-wanted criminals – the cost of the war has been high. More than 35,000 people have been killed in drugs-related violence since December 2006, and this has spilled over to affect the business climate.
In the northern city of Monterrey, where a ferocious battle between two of the country’s cartels has caused the murder rate to double in recent years, business people say that investment decisions are being put on hold, and some executives have simply decided to pack up in search of more security north of Mexico’s border with the US.
“Security has become one of the most important factors that business people have to think about here,” says José Mario Garza Benavides, director-general in Monterrey of Coparmex, a nationwide group that represents private business.
LONGER-TERM TRENDS
Yet there are at least three reasons to think that growth in Mexico could turn out to be more vigorous and longer lasting than economists had assumed just a few months ago.
The first is the US and, specifically, the mounting consensus that economic recovery this year in the world’s largest economy will be more robust than people had thought. The US, which shares a 2,000 mile border with Mexico, accounts for about 80% of all Mexican exports – and exports represent approximately 25% of GDP.
That improved outlook has been a boon for Mexico, with exports in January rising almost 30% compared with the same month last year.
The automobile sector, in which production expanded 15.7% in February compared with the same period in 2010, is a case in point. In recent years, Mexico has emerged as a world leader in vehicle manufacturing as the increasing shift towards compact cars forces manufacturers to base production in countries with cheaper labour costs. According to Mexico’s economy ministry, car manufacturers have announced $4.4 billion in new investment in Mexico over the next four years.
More generally, Bruno Ferrari, the country’s economy minister, says that there are a record 915 investment projects in the pipeline that, if executed, would represent a total investment of more than $68 billion in the next two to four years. “The dynamism has been astounding,” he says.
One encouraging sign for Mexico is that exports to the US, which account for 13% of the total to that country, are growing annually by 30% – compared with just 23% in the case of Chinese exports to the US, and 22% for Canadian exports. That suggests that Mexico is gaining in competitiveness – in large part because of a weaker peso – compared to its main rivals.
The second reason for greater optimism is that there are clear signs that the recovery in exports is feeding through into the domestic economy. In March, Inegi, the statistics agency, reported that industrial production in January increased 1.4% on the previous month – the biggest monthly rise in more than a year.
The latest figure brings industrial production growth over the past 12 months to 6.6%, with the construction industry – much of that residential home-building, as well as factory and warehouse construction – growing 8.3% in January compared with the same month a year ago.
Ignacio Deschamps, president of the Mexican Association of Banks (ABM), says that growing domestic demand is likely to fuel an increase this year and next in bank loans to the private sector of between 15% and 20%. “We are looking not at a year of recovery but of very dynamic growth,” he tells Emerging Markets.
All this is good news for Mexico’s stock exchange, the BMV.
Last year there were six initial public offerings (IPOs) on the exchange – the highest number in at least 15 years. So far this year, companies have raised Ps13 billion in capital through the exchange. Luis Téllez, the exchange’s president, tells Emerging Markets, “People are no longer tapping the New York Stock Exchange for capital because they realize that they can now do it here.”
Mexico’s return to growth is being supported by solid macroeconomic fundamentals. Today, Mexico’s public debt is just 25% of GDP, and the portion of external debt is less than 20% of that total. International reserves are pushing $130 billion – a record.
The fiscal deficit this year, excluding investments by Pemex, is set to be a mere 0.5% of GDP compared with close to 4% of GDP in the case of Germany and nearly 12% in the case of Ireland. Meanwhile, low inflation has kept the central bank’s benchmark interest rate at just 4.5% for more than 18 months. Most analysts do not expect that to change until the fourth quarter of this year at the earliest.
The combination of all these factors has led analysts to forecast growth this year of 4.1%, on average, and of 4% in 2012. That is a long way short of the 6% or more that many economists believe the country could grow if it pushed ahead with the pending structural reforms.
But set against a backdrop of the relatively disappointing performance during the first decade of the 21st century, Mexico suddenly looks as if it is in for a good couple of years.