Mexico’s approaching growth spurt
Jun 21, 2012
Mexicans have “looked on with envy in recent years as Brazilians won a reputation as Latin America’s chosen people”, says Elisabeth Malkin in The New York Times. The Brazil story gained momentum as China drove the commodity boom, fuelling Brazilian exports, while the huge domestic market also excited investors. But even before Brazil went off the boil amid China’s recent downturn, Mexico was being unfairly ignored.
Investors have been put off by ongoing drug-related violence. The economy’s close links to America – 80% of its exports go there – meant many dismissed it as a mere US outpost. Yet Mexico has come a long way over the past 20 years. In 1993, the central bank became independent, bolstering its inflation-fighting credibility and helping lower inflation from 43% to 4% today.
Interest rates have also dropped to similar levels. The national debt is now just 27% and the budget deficit last year was only 2.5% of GDP. Mexico passed a balanced budget rule in 2006, imposing fiscal discipline on the government. It now has a “sound macroeconomic footing”, says Richard Fisher in the FT.
Privatising state-owned entities helped lay the foundations for growth, as did joining the North American Free Trade Agreement in 1994. It lowered tariffs and, along with a falling peso, has made Mexico increasingly competitive. It helped spur a revival in manufacturing, which has hit record levels. Nissan and Honda are planning new plants in Mexico and consumer sentiment is at a four-year high.
Growth has rarely exceeded 2% a year over the past decade, however, although that should now change. The frontrunner in July’s presidential election, Enrique Peña Nieto, wants to allow private companies to join state-owned monopoly Pemex in producing oil. He also wants to dismantle the burdensome regulations that have hampered the labour market.
Unblocking these two bottlenecks should give economic output a hefty fillip, reckon analysts. It may be too early to be sure that reform will definitely happen, says Morgan Stanley’s Gray Newman. But “I suspect we are on the eve of the most promising opportunity the country has seen in more than a decade”. Brazil may keep hogging the headlines, but the country to keep an eye on for now is Mexico.
FREE - MoneyWeek's daily investment email
Our free daily email, Money Morning, is an informative and enjoyable analysis of what's going on in the markets. Written by our Editor, John Stepek, and guest contributors.
Sign up FREE to Money Morning here.