[ Approach ][
Capabilities ][
Staff ][
Clients ][ Press ][ Library ][
Contact ]
|
Investing in Mexico: Still a Bet on the United States By Jonathan Lemco NEW YORK (KWR) -- Mexico is the second largest trading partner of the United States, after Canada. As such, its economic future is almost entirely dependent on the fortunes of the behemoth to the north. The relative strength of the US economy is a necessary, but not sufficient, condition for Mexico’s economic recovery. Not only must the US economy be strong, but also Mexico must continue to put its fiscal house in order. Since Mexico’s fiscal crisis in 1994, it has demonstrated admirable fiscal prudence. The Central Bank and various Finance Ministers have proven capable managers of the nation’s economy. Public debt/GDP is a low 25% of GDP, which has not been seen since the 1970s. Further, the Mexican financial system has been able to withstand various shocks. Not surprisingly, the leading credit ratings agencies have rewarded Mexico by upgrading its credit ratings to the highly desirable “investment grade” status. In turn, Mexico’s borrowing costs have dramatically decreased and institutional investors have jumped at the opportunity to hold Mexican debt in their portfolios. This positive economic and financial evolution has been accompanied by the emergence of a viable and competitive multi-party political system. The judiciary is relatively independent of political machinations as well, although we would not push that point too far. Since 1990, a series of major reforms affecting liberalized trade, more open domestic capital markets, tax reform, pension reform, bankruptcy law reform, and others have been implemented. In short, the Mexican political and economic system has matured in the last few years, and investors have rewarded Mexico for that. But much remains to be done. Mexico remains a developing country, and its infrastructure needs are huge. To that end various structural reforms and revenue enhancing policies are needed. This will not be an easy matter to bring about however, because President Fox has had difficulty passing legislation through the divided Congress. Further, Mexico faces competitive challenges from other developing countries, notably China. But the first priority is to revive the economy and to attain sustained growth. Many Wall Street economists are forecasting Mexican GDP growth in the 1-2% range in the fourth quarter of 2003. This is consistent with the anemic growth of earlier this year. Also, manufacturing production, and especially automobile production, remains in the doldrums and is expected to decline 0.3% in the fourth quarter. Unemployment is expected to rise. But inflation is no longer a serious problem and at 4% is at its lowest level in forty years. Mexican labor markets are far too rigid and regulations are excessive. Corruption is a factor in different aspects of public life, although there is evidence to suggest that this has lessened slightly in the past two years. Some analysts question why Mexico has not grown as rapidly as its largest trading partner, the United States. Beyond the obvious answers relating to productivity and development differences, it is worth noting that that which links the two economies is concentrated in the manufacturing sector. But this sector is one of the weakest in the US. Mexico’s economic future should not be tied to the manufacture of textiles, shoes, clothing etc. When Mexico emerges from a “developing” to a “developed” status, it will be because it has created a large, productive and profitable service sector. In the North American mass media, much is made of the competitive threat to Mexico posed by China. Without dwelling too much on this issue, we should acknowledge that the competition is real, but it is not entirely one sided. Chinese competition has hurt the Maquilladora sector and foreign direct investment in general. But China also imports finished goods from Mexico, and Mexican suppliers would be well advised to see China as a vast and attractive market. The more interesting question is will US manufacturing output increase in the near term? If it does, then Mexican exporters will get a boost. Going forward in the next few months, a central issue from an investor’s point of view is the likelihood of tax and/or electricity reform passage through the Congress. At the moment it is an even bet at best. But if these reforms pass with most of their provisions intact, it will be a victory for President Fox and a victory for investors in Mexico. In the case of fiscal reform, tax collection is a modest 12% of GDP at present. This is below most other investment grade sovereigns. Currently oil revenues account for about 30% of total revenues. Should oil prices fall, the consequences for Mexico will be particularly negative. A substantial fiscal reform package could increase tax revenues by approximately 0.75% to 1% of GDP in the short run, and by another 2% in the next four years. Business and consumer sentiment would also improve. The electricity reform effort is also important from an investment perspective, because it could lead to an increase in FDI of about US $2 billion per year for the next ten years and an increase of 1.3% GDP growth, according to the Mexican Ministry of Finance. Should the reforms pass within the next six months, I think that the credit ratings agencies will reward the Mexico sovereign credit. Mexico continues to make strides to modernize its economy and polity. Although a majority of Mexicans would assert that their lives are not substantially better today than they were when Vincente Fox was elected President three years ago, the passage of the tax and electricity reforms, should they occur, would go a long way to improve domestic consumer sentiment and to promote foreign direct investment.
|
