Mexico: High Stakes Situation

Much has been said in recent years about the promising Mexican economy. It is often mentioned in the same breath as the mighty BRICS, given Mexico’s increased international focus in the past quarter-century. This has paid great dividends, but has exposed Mexico to today’s wobbly world economy. Does global uncertainty threaten to render the promise hollow?

Thus far, Mexico’s stats remain impressive. Third-quarter GDP surprised on the high side, rising 5.3 per cent at annual rates. Growth was broadly based, and came in spite of persistent declines in oil production. Manufacturing activity is powering industrial production, and solid export growth lifted the trade balance to a small surplus in December. Steady economic growth lowered the unemployment rate below the 5 per cent marker in the fourth quarter of 2011, and the trend is decidedly downward. Inflation is creeping upward, but all things considered, the economy looks in good shape.

A quick visit to Mexico last week revealed internal concern that European weakness will undermine the strong momentum. Mexicans are acutely aware of the damage fiscal imprudence can cause, given their own difficulties in the 1980s, and the mid-1990s peso crisis is still a fresh memory. The worry is not so much about direct effect; like Canada, Mexico is baffled by the recent success of its exports in Europe. Fears are centred on the indirect effect of Europe undermining US momentum and by extension weakening Mexican exports – the key source of recent growth. Hopes are high that the upcoming G20 meeting in Los Cabos will make progress in resolving the debt and financial crisis.

A related concern is the outcome of the US election. Slowing growth stateside could influence the focus of the debate, and rekindle protectionist sentiment. Such uncertainty is known to delay current investments in favour of a wait-and-see stance.

Not all the threats are external. Mexico itself is headed to the polls on July 1, a process that is known to delay business activity as electioneering consumes a large amount of political energy. Candidates are releasing economic plans that appear to encourage the economy along its current path, but the details will not likely be known until campaign momentum increases in the coming weeks.

Mexico is further threatened by recent intensification of a perennial problem – crime and corruption. Despite efforts by the current regime to contain and reduce crime and violence, activities have spread regionally and anecdotal evidence suggests that multinational corporations are feeling the effects.

Heightened threats to international investments in Mexico are always untimely, but perhaps moreso at present. With Chinese labour costs rising significantly, international business is scanning the globe for investment locations that have abundant labour of various skill levels. This has only been enhanced by aging of the population, which has developed economies and even key emerging markets increasing future investment plans. Mexico is a logical suitor, but increased instability is a key threat to attracting this new global wave of outward investment.

The bottom line?

Mexico is potentially on the verge of a new growth phase. It also faces key threats, some that it can influence, others that it can’t. Best to work on the former, and capture that growth.

This commentary is presented for informational purposes only. It is not intended to be a comprehensive or detailed statement on any subject and no representations or warranties, express or implied, are made as to its accuracy, timeliness or completeness. Nothing in this commentary is intended to provide financial, legal, accounting or tax advice nor should it be relied upon. Neither EDC nor the author is liable whatsoever for any loss or damage caused by, or resulting from, any use of or any inaccuracies, errors or omissions in the information provided.