External volatility main concern for Mexico

Mexican officials consider the external environment as the main risk now that the economy seems to have emerged stronger after the severe recession in the wake of the global financial crisis in 2009, but are confident they have the means to tackle any future volatility.

Fernando Aportela Rodriguez, Mexico’s deputy finance minister, told Emerging Markets that he had the “proper tools to handle external volatility”.

“I have the proper tools. This is what the Mexican authorities have been working on over the time,” said. Mexico currently has $165 billion in international reserves and some $230 billion when the International Monetary Fund’s Flexible Credit Line (FCL) is included. “This is a good level to face external volatility,” he said. The new administration has also sent a balanced budget to the Mexican Congress, and this shows a “commitment to stability,” said Aportela.

While Mexico is close to its annual growth potential of 4%, it has engaged a series of reforms during the first 100 days of president Enrique Pena Nieto that have been praised by investors as the correct move to lift the performance of the second- largest Latin American economy.

Mexico’s economic growth has been higher than Brazil’s – the region’s largest economy in recent years – and if the opening of the oil and telecom sector materializes, Mexico is poised to receive large foreign direct investment in those key sectors of the economy.

“For many years, there have been difficulties to pass reforms. But now there is a strong commitment towards this,” said Aportela. Pena Nieto concluded a pact with the main political parties shortly after his election to push forward an ample reform agenda.

Hasan Tuluy, vice president of the World Bank for Latin America, said that the kind of reform agenda the new administration in Mexico had set out would allow them to progress. “We are very positive,” he said.

“Those are very positive signs, because the size and importance of the Mexican economy is such that it will become a driver for the sub-region,” he said. “They have undertaken to look very profoundly at fiscal reform and they have taken on improving the quality and relevance of education. They are looking at some services sectors and we are already seeing much more investment taking place and that will lead to a diversification for the economy,” he said.

Annual economic growth could approach 5% if reforms are passed in key sectors, according to Ramon Aracena, Latin America chief economist at the Institute of International Finance. But he warned that reforms were very difficult to pass “when you are not up against the wall”.

“These efforts on the structural reform agenda and the possibility that we will pass these reforms should give Mexico a higher GDP potential,” said Aportela, who nonetheless did not give a figure for such GDP potential.

Standard and Poor’s, the rating agency, gave a one in three chance that “policies that meaningfully improve Mexico’s fiscal room for manoeuvre” will be enacted, when it raised the country’s long-term sovereign credit outlook from stable to positive earlier this week.

Meanwhile, the strong fundamentals of the Mexican economy and the recent cut in interest rates may intensify short-term capital flows. “We have a flexible exchange rate regime that has proven to be very effective in absorbing external volatility and we have strong international reserves. This is a good level to handle external volatility,” Aportela said.