When Richard Fisher, president and chief executive officer of the Federal Reserve Bank of Dallas, addressed a select crowd of analysts and journalists in Mexico City this March, he told them something that they had probably never heard before from the mouth of a US economic heavyweight.
“The moment has come to change our perception of Mexico,” said Fisher, who is also a member of the Federal Open Market Committee, the Fed’s principal monetary policymaking group. “The reality is that many macro figures place Mexico in a better place than the US.”
As Latin America’s second-largest economy gears up for presidential elections this year, the economy is looking not only solid but even healthy. Growth last year reached a respectable 3.9%, and is on track for a similar performance this year. Inflation, which has been a thorn for some of the region’s economies, is under control at just over 4% over the last 12 months.
José Antonio Meade, Mexico’s finance minister, tells Emerging Markets: “There is no ambiguity about it – inflation is on course to remain stable throughout the rest of the year.”
Remarkably – and a sign of how stable Mexico’s macroeconomy has become over the past 15 years or so – interest rates in Mexico have remained at 4.5% since July 2009.
All of this is happening with a relatively balanced budget: the consolidated fiscal deficit this year is the equivalent of just 2.5% of gross domestic product – a modest figure compared with the double-digit numbers of some industrialized countries. Little wonder that Fisher concluded: “The US Congress should ask to borrow Mexico’s fiscal handbook.”
The upbeat scenario is particularly welcome for a country that over the past decade or more has fallen consistently short of Latin America’s average growth rate.
Meade says that in spite of persisting external threats, such as the problems in the eurozone and growth prospects for the US economy, he sees no internal threats to the government’s estimate for economic growth this year. “The main variables have moved in favour of our 3.5% estimate, and they’ve even moved in the direction in which the scenario could support a bigger increase,” he says.
Mexico’s recovery has come about primarily through exports. Last year, the country sold $349.7 billion in goods overseas, an annual increase of 17.2% – and of 52.2% compared with 2009 when Mexico was hit by recession.
Inevitably, some of that growth was catch-up. But Mexico has also become more competitive. Rapidly rising labour costs in China have narrowed the once-huge gap between wages in the two countries. At the same time, increased fuel prices have made it more expensive to manufacture in China and then ship to North America.
That fact has placed a higher value on Mexico’s geographical proximity to the US, making it a much more attractive place to centre manufacturing for export. In addition, its factory tradition combined with a young population has created a vast pool of semi-skilled and skilled labour whose costs have remained stable.
US executives with operations in Mexico even say that cultural similarities as well as the fact that Mexico City is on Standard Central Time provide a welcome change from making calls to Asia in the middle of the night. As Carlos Bello, director-general of the Mexican Federation of the Aerospace Industry (Femia), puts it: “It may seem like a small thing, but being in the same time zone makes doing business a lot easier”.
Just one of the results of Mexico’s gains in competitiveness is the country’s share of total US imports, which has increased to about 12% from 10.3% in 2008 – and to more than 13.5% in the case of manufactured goods. Together with China, which entered the World Trade Organization in 2001, Mexico is the only country to have increased its share of total US non-oil imports during the last decade.
“Mexico is consolidating its vocation as a world-class exporter,” says Sergio Martín, chief economist for Mexico at HSBC in Mexico City.
Nowhere is the renewed appetite to manufacture in Mexico more obvious than in the car industry, where companies such as Ford, VW, Chrysler-Fiat, Mazda, General Motors and Nissan have announced investments in the past two years alone totalling at least $6.6 billion.
Meanwhile, the 600-odd auto-parts companies based in Mexico have won space in the US, jumping from about 17% of US imports in 2005 to 26.1% last November, according to the US Census Bureau.
RISING ECONOMIC ACTIVITY
Lorenza Martínez, assistant secretary at the economy ministry, tells Emerging Markets, “We’re confident that Mexico will continue to gain market share.”
Increasingly, there are signs Mexico’s domestic economy is also starting to rev its engines. One indication is the number of bank loans to the private sector, which expanded 10.4% in January compared with the 12 months previously. Significantly, the total stock of credit for housing and for businesses have both surpassed their pre-crisis levels.
Meanwhile, consumer credit is expanding at more than 19% a year, retail sales are growing and have surpassed pre-crisis levels, and the country’s consumer confidence index stands at about 92 compared with 79 in September 2009.
“Consumption and, to a lesser extent, investment spending are likely to remain the main drivers of economic growth in Mexico,” says Arturo Porzecanski, distinguished economist-in-residence at the American University in Washington. “It is sluggish growth in the US, and periodic nervousness in the financial markets with regard to the outlook for Europe that are holding Mexico back from GDP growth in excess of 4%.”
For all that momentum, Mexico still faces plenty of challenges.
Domestically and internationally, the country’s transition from one-party rule prior to 2000 towards a fully-fledged democratic system was hailed as a desirable and necessary step in Mexico’s integration into the global economy.
Yet democracy has brought its frustrations, and political gridlock in Congress has often stymied attempts to push reforms that many experts consider vital to boost growth.
Just one example is Mexico’s oil sector. The lack of expertise at Pemex, the state oil monopoly, and a constitutional ban on private investment – private companies cannot enter into joint ventures with Pemex and are limited to taking up service contracts (a situation that is of little or no interest to the world’s oil majors) – have resulted in about a 25% drop in oil production since 2004.
The fall in production in recent years has focused renewed attention on the country’s tax regime, which economists insist relies too heavily on oil. While about one-third of total government revenue comes from oil, the non-oil tax take is equivalent to just over 10% of GDP – one of the lowest levels in the hemisphere.
The centre-right administration of president Felipe Calderón is only too aware of these vulnerabilities. But opposition in Congress diluted even the government’s modest reform proposals on tax and energy. In each case, the final product was legislation that fell short of what most economists believe the country needs.
Agustín Carstens, governor of Mexico’s central bank, tells Emerging Markets: “To achieve higher rates of growth, we need to make progress on structural reforms that increase the productivity and competitiveness of the economy”.
The lack of successful change is affecting other areas. During the past five years, Mexico has been fighting a vicious and bloody offensive against organized crime, in particular against several well-funded and well-armed drugs cartels.
There have been some successes, and Calderón’s team rightly points out that it has captured or killed more than half the people on a list of Mexico’s 37 most-wanted criminals. But the military-led approach – the government has deployed about 50,000 soldiers to towns and cities across the country in an effort to restore law and order – has sparked a wave of violence in parts of the country. According to Mexico’s own official figures, the murder rate has climbed from about eight per 100,000 inhabitants in 2006 to more than 22 today.
One of the problems is that the country’s security forces are split into about 2,000 separate forces operating at the federal, state and municipal levels. There is little or no information-sharing between them, and in some cases rivalry and jealousies have undermined police work.
Even here, though, Congress has yet to approve a police reform bill, introduced by Calderón last year, which aims to reduce the number of forces and create better coordination between them.
JULY ELECTIONS
It is against this backdrop of robust economic growth but rising, drug-related violence and congressional gridlock that the country of about 112 million will go to the polls in July to elect a new president, senate and lower house of congress.
According to the latest polls, Enrique Peña Nieto, the telegenic candidate for the opposition Institutional Revolutionary Party (PRI), has a commanding lead over Josefina Vázquez Mota, candidate for Calderón’s conservative National Action Party (PAN). In third place is Andrés Manuel López Obrador, the veteran left-wing campaigner who came a tantalizingly close second in the 2006 presidential elections.
This month, BGC, a respected Mexico City-based polling company, put Peña Nieto, the 45-year-old former governor of the state of Mexico, which surrounds the capital, on 47%. The same poll placed Vázquez Mota, an economist, in second place with 29% – though a separate poll, published a week earlier, put her just seven percentage points behind the frontrunner.
In an interview with Emerging Markets, Peña Nieto insists on the need to open Pemex to private capital. The ideas, which would form part of his policy proposals once the official campaign begins at the end of this month (March) would "aim at substantially increasing private investment levels, especially when it comes to exploration and exploitation of hydrocarbons".
He also says it is vital to push through other, business-friendly reforms that would “allow for Mexico to maximize its economic and trade possibilities”. One priority would be a tax reform. Another would be to increase infrastructure investment through a scheme of public-private partnerships.
For now, Peña Nieto seems by far the most likely of the three candidates to become Mexico’s next president. That would doubtless be a change the private sector and international investors would be comfortable with. But even López Obrador, who the PAN in 2006 tried so hard to paint as a left-wing radical in the mould of Hugo Chávez, president of Venezuela, has vowed fiscal austerity and a balanced budget.
All of that has reassured markets that July’s elections are not likely to represent a source of economic instability. Indeed Meade, Mexico’s finance minister, sums this up: “Economic stability has become state policy. It is an asset, and it is one that nobody questions.”