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Mexico:
Still A Good Investment Bet
By
Jonathan Lemco
In
the past few months, the US press has devoted a great deal
of attention to the challenges faced by Mexican workers. The
media has stressed that China will compete ferociously for
Mexico’s export markets, and that the Mexican labor force
will be a big loser. Also, it is noted frequently that Mexican
educational levels have not improved appreciably in recent
years. Many critics stress that vital fiscal and other structural
reforms will not pass the Mexican legislature, and this will
severely crimp economic policy-making. Others note that the
revenue base remains too small. There is truth to these allegations,
but they do not tell the whole story.
According to the Mexican Finance Ministry, Mexico’s GDP growth rate
is expected to be in the 4% range in 2004. Inflation is likely to remain
a moderate 3.6%. The Mexican private sector is demonstrating higher levels
of confidence in the economy going forward. Although China is a meaningful
economic threat, it is also the case that China is buying Mexican commodities
in substantial amounts. Trade is a two way street, despite all of the attention
devoted to Mexico losing jobs and investment. It is also the case that
the China threat has been less severe than some expected because of currency
depreciation. Fewer businesses have left Mexico than one would anticipate,
given the space devoted to this issue in the US media.
Further, and more important, Mexico’s economic future has far more
to do with the fortunes of the United States than the fact that Mexico
competes with China. The US is Mexico’s largest export market, and
the two economies are substantially integrated. Over the past six months,
the US manufacturing sector has expanded at an annualized rate of 7.1%.
Mexico’s manufacturing sector seems to be keeping pace, and in fact
has been growing faster than the US. The February trade report showed Mexican
manufacturing exports up 10% on a yoy basis. It is important to note that
this does not include the trade that will come from the 1% rise is US manufacturing
in February. Investors should look for stronger output from Mexico in March/April
as the effects from that strong US month are felt by its southern neighbor.
In a very meaningful way, as the US economy goes, so goes Mexico’s.
In addition, in 2003, Mexico enjoyed the benefits of free trade agreements
with the NAFTA nations, as well as Europe and Japan. Several multinational
corporations are putting new money into Mexican industry. Volkswagen has
recently announced a US $2.6 billion investment in new plants, with Mexican
operations now acting as an export platform to Europe, taking advantage
of the weak dollar. Japanese companies have made new investments, based
on similar strategic thinking. Wal-Mart announced at the end of March that
it would invest US $600 million in the next few months. BBVA’s decision
to acquire Bancomer’s remaining shares should also deliver a substantial
inflow. In short, Mexican entities are engaged in deepening financial,
productive and trade links.
On the fiscal side, the Mexican Central Bank continues to guide the economy
with strong budgetary discipline. The budget deficit is on target for the
year at an acceptable 0.3%/GDP. The surplus in February was 8.1 billion
pesos, with the year to date surplus of 35 billion pesos. That compares
to a surplus of 18.4 billion pesos in the same period in 2003. Further,
in February, recurring revenues expanded by 1.5% in real terms. That includes
a 5.3% rise in tax revenues. The major reasons for this improvement were
reduced spending, higher oil price revenues, and improved levels of VAT
tax receipts. Overall, this improved fiscal performance also reflects the
fact that Mexico should be better able to withstand external shocks or
economic contagion.
We do not mean to dismiss Mexico’s problems however. There has been
little progress on passing meaningful structural reform legislation in
the Mexican Congress. Until that occurs, there will be limits on the economic
progress that Mexicans can expect. Also, the Mexican political system now
consists of three viable parties. That is good for democracy, but it makes
policy-making that much more difficult. President Fox appears politically
weak relative to the Congress. Furthermore, Mexico’s infrastructure
needs are tremendous and its level of economic inequality substantial.
But there appears little that the government can do to address these development
issues in the short-term. None of this is new, of course. But what is different
is that popular expectations for the success of the Fox government have
been especially high, and many observers have been disappointed.
All this being said, Mexico continues to grow at a decent level. Its fiscal
performance has been excellent such that the credit ratings agencies have
steadily upgraded the credit in recent years to an investment grade level.
Thus far in 2004, Mexican bonds have been among the best performers in
the entire corporate bond universe. We conclude by noting that we expect
that Mexico will remain an attractive investment opportunity for the foreseeable
future.
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