From
an investor's point of view, Mexico has made tremendous
economic and political strides in recent years.
Economic growth has surged, in part because Mexico
has benefited from its membership in the North
American Free Trade Agreement. Mexico's crippling
debt load of the 1980s and early 1990s has been
reduced substantially. Employment is at an all
time high with unemployment at only a 3.1% level
in September. Inflation has been contained at
approximately 4.9% year-on-year. Education levels
are slowly improving. And President Fox was elected
in the freest vote in Mexico’s modern history.
As a consequence of this improvement, Mexico’s
interest rate spreads have narrowed throughout
2002, unlike several other Latin American sovereign
credits. Furthermore, the credit rating agencies
rate Mexico at investment grade levels (Baa2 with
“Moody’s” and “BBB-“
with Standard & Poor’s). As of December
2002, only Chile is higher rated in the entire
Latin American region. As its credit fundamentals
have improved, Mexico has become an investor darling,
and has issued well-received debt throughout this
past years. We expect the sovereign, Pemex, Telmex,
Cemex and other Mexican issuers to return to the
marketplace in 2003.
Of course, there are problems along the way. Mexico's
economic future, more than ever before, is intimately
tied to the United States. As the US economy slows
at year-end, so has Mexico's and earlier growth
economists' forecasts for the year have been recently
reduced from 1.7% to 1.2% GDP growth. This deceleration,
not surprisingly, is directly related to a decline
in export-oriented industrial production. Ironically,
one of the consequences of the improvements in
recent years is that Mexico is now having trouble
competing with certain lower wage economies. Most
notably, there have been several media stories
recently noting how Mexican industry and jobs
in selected low-tech industries are leaving for
lower wage China. We think this is a natural development
in a rapidly modernizing economy, however, Mexican
industry will have to adapt to worker demands
for higher wages and improved benefits, but there
will be an economic cost to this as lower wage
countries continue to compete effectively.
It is also worth noting that the structural reform
agenda of the Fox Administration is hindered by
a tense relationship between the executive branch
and the PRI, the main opposition party. Structural
reforms in the areas of electricity, labor and
education are needed to improve competitiveness
and to promote economic growth.
In the next month, investors should pay attention
to the political wrangling associated with the
next federal Budget. We think that the Budget,
when it is finally passed by year-end, will include
fiscally prudent provisions. Although President
Fox’s administration is assuming a 3.0 %
growth rate in Mexico in 2003, it is also proposing
a modest 1.9 % real increase in expenditures.
Overall revenues are expected to outpace expenditures
slightly. Also, projected oil revenues, which
are critical to the Mexican economy, are based
on a $17.00 per barrel price for the Mexican oil
basket. This is almost $5 below the estimated
average for 2002. Currently, the Mexican oil mix
is hovering near the $20 level. Unless prices
collapse, which is unlikely given the uncertainty
surrounding a potential war in Iraq, it is difficult
to imagine the average oil price in 2003 will
be substantially below the budget assumption.
Furthermore, we think the 2003 Budget will include
a provision whereby the deficit target will be
increased to 0.65% from 0.5%. This slight increase
should not be alarming to investors. Away from
the budget, investors will also be focused on
electricity reform negotiations. If these discussions
go well in the next few months, it will send a
very positive sign to the financial community.
In short, we expect that Mexico will continue
to grow at a steady pace while maintaining fiscally
prudent policies. President Fox will have to expend
political capital to pass much needed structural
reforms, but we think he will be able to do so.
The 2003 Budget assumptions are conservative and
achievable. At a time of economic and political
uncertainty in much of Latin America, Mexico stands
out as a positive model.
