{"id":30928,"date":"2012-07-17T22:22:14","date_gmt":"2012-07-18T02:22:14","guid":{"rendered":"http:\/\/countingpips.com\/forex-news\/2012\/07\/why-mexicos-economy-could-be-one-of-the-most-attractive-emerging-markets\/"},"modified":"2012-07-17T22:22:14","modified_gmt":"2012-07-18T02:22:14","slug":"why-mexicos-economy-could-be-one-of-the-most-attractive-emerging-markets","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/forex-news\/2012\/07\/17\/why-mexicos-economy-could-be-one-of-the-most-attractive-emerging-markets\/","title":{"rendered":"Why Mexico\u2019s Economy Could Be One of the Most Attractive Emerging Markets"},"content":{"rendered":"

By MoneyMorning.com.au<\/a><\/strong><\/p>\n

Enrique Pe\u00f1a Nieto has just been elected president of Mexico.\u00a0 It’s not what you’d describe as a dream job.<\/p>\n

Mexico’s problems put all our worries into sharp perspective.\u00a0 The most tragic and visible of these woes is the violent drug war. The war against the cartels (as well as infighting between cartels) has left 55,000 people dead over the last five years. It\u2019s easy to see why most investors give the country a wide berth.<\/p>\n

But they\u2019re making a mistake. Behind the gory headlines lies a country with strong economic growth and surprisingly prudent management. Here\u2019s why Mexico’s economy<\/strong> could be one of the most attractive emerging markets in the world.<\/p>\n

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A Manufacturing Boom in Mexico’s Economy<\/h3>\n

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This may surprise you, but Mexico’s economy has become a formidable export power. Manufacturing accounted for just 2% of GDP in the 1980s. Now it\u2019s 24%.<\/p>\n

The boom began when the North American Free Trade Agreement (Nafta) was signed in 1994. Over the last ten years, the weak peso has given the sector a further boost.\u00a0Healthy demographics – with a large and growing work force – also checks wage inflation and makes Mexican goods more competitive.<\/p>\n

The gap between Chinese and Mexican wages has narrowed sharply from 260% in 2006 to just 10% today, notes HSBC\u2019s Sergio Martin. Taking into account travel costs, Mexican factories now beat Chinese ones on cost for many goods. That explains why 12.5% of America\u2019s imports currently come from Mexico. That\u2019s the highest in a decade, and second only to Canada.<\/p>\n

Of course, with so many of its exports going to one place, Mexico\u2019s fortunes are tightly tied to America\u2019s. But that\u2019s not necessarily a bad thing, as David Rees at Capital Economics points out: \u2018With America growing at around 2%, Mexico\u2019s economy should grow at between 3% to 4%.\u2019<\/p>\n

It\u2019s \u2018not spectacular\u2019, but it beats plenty of other parts of the world. More importantly, while Mexico is still growing its share of the US market, it’s also increasing sales to its Latin American neighbours.<\/p>\n

In the last six years, the share of Mexican exports going to the US has fallen from 90% to 80%. Meanwhile, the overall value of exports, which currently stands at $700bn, is expected to double within the next eight years.<\/p>\n

Mexico’s economy is also \u201cmoving up the value chain\u201d. \u2018More jobs, more energy, [and] more foreign investment are going into more advanced applications\u2019, says Scot Overson, boss of chipmaker Intel\u2019s Mexican division.\u00a0 These include \u2018technology and aerospace\u2019, or \u2018advanced manufacturing, not just simple unskilled manufacturing. Those aspects of Mexico economy seem to be accelerating.\u2019<\/p>\n

The country has also been wise enough to avoid squandering the proceeds of the boom. Public debt stands at 35% of GDP and falling.Inflation, historically a bugbear, is hovering around 3.8% – below the upper band of 4% targeted by the central bank.<\/p>\n

It helps that central bank governor Agust\u00edn Carstens is seen as a safe pair of hands. As finance minister, he hedged Mexico\u2019s entire oil output just before the oil price tanked in late 2008. It saved the nation $8bn and – so the joke went – made him \u2018the world\u2019s most successful, but worst-paid, oil manager\u2019.<\/p>\n

The Three Biggest Challenges Facing Mexico’s Economy<\/h3>\n

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Despite Mexico undergoing one of its best-ever periods of growth and economic stability, its main stock index, the MEXBOL, doesn\u2019t look too expensive. The price\/earnings (pe) ratio of 14 is pretty much in line with the index average since its 1978 inception.<\/p>\n

The main drag on the country is the drug-related violence. Any long-term solution can\u2019t be down to just Mexico. Consumer countries (such as the US) need to alter policies too. That won\u2019t happen in the near future.<\/p>\n

However, there\u2019s plenty of room for improvement. Mexico\u2019s murder rate has tripled to 22 per 100,000 people \u2013 far higher than other Latin American countries with similarly powerful narco gangs. If any progress could be made here, Mexico\u2019s other attractions would become far more apparent to investors.<\/p>\n

Pe\u00f1a Nieto has promised to halve deaths by changing tactics. Instead of using the army to take on the cartels, he will use the police to minimise civilian deaths. He has also recruited the Colombian police chief credited with helping to stem that country\u2019s problems. Even Nieto\u2019s critics think he can halt the violence – although admittedly that\u2019s because they think his party, PRI, will do a secret deal with the gangs.<\/p>\n

The second big problem is Mexico\u2019s falling oil output. Mexico has plenty of oil, especially offshore. The trouble is that while state-owned Pemex has exclusive rights to the country\u2019s oil, it lacks the capital and expertise to develop new fields. Production has fallen from 3.4 million barrels per day (bpd) in 2006 to 2.5 million today. It\u2019s expected to slip to 2.2 million by 2016.<\/p>\n

So Pe\u00f1a Nieto has proposed partial privatisation. This won\u2019t be easy: Pemex\u2019s position is enshrined in the constitution. However, Eduardo Gonzales, a lawyer with Mexican firm Creel, believes it can be done. \u2018Private equity funds are already raising the finance to take advantage of it.\u2019\u2028If he can pull it off, Capital Economics reckon it would add almost 1% a year to Mexico\u2019s GDP.<\/p>\n

The final challenge is Mexico\u2019s uncompetitive domestic economy. Many markets are dominated by local oligopolies that rip off the people and block new entrants. Inflexible labour laws and a tiny tax base are also a problem: Mexico\u2019s total tax take is about 22% of GDP, far less than the 36% raised in Brazil.<\/p>\n

The oligopolies look safe for now. Many supported PRI, and Pe\u00f1a Nieto is unlikely to attack them in his first term. Instead, he will probably focus on freeing up the labour market and reforming tax, says Rees. \u2018Strong exports will keep the economy ticking over but if the domestic economy could be reformed then we would see exceptional growth.\u2019<\/p>\n

Invest in the Mexican Economy?<\/h3>\n

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Be warned. Mexico’s economy is definitely a \u2018risk-on trade\u2019: when investors get nervous they will jump ship indiscriminately. However, in the long run, it has great potential. Put it this way \u2013 if you\u2019ve been thinking of allocating capital to the BRIC countries<\/a>, I\u2019d suggest looking at Mexico as an alternative.<\/p>\n

James McKeigue<\/strong><\/p>\n

Contributing Writer, Money Morning <\/strong><\/p>\n

Publisher\u2019s Note: <\/em>This article originally appeared in MoneyWeek (UK).<\/a> <\/em><\/p>\n

From the Archives…<\/strong><\/em><\/p>\n

The Credit Market Debt Bubble and the Role of Gold<\/a>
\n13-07-2012 – Greg Canavan <\/p>\n

How to Survive and Thrive from China’s Bust<\/a>
\n12-07-2012 – Kris Sayce <\/p>\n

Payday Loans: Why This Lender of Last Resort Isn’t the Bad Guy<\/a>
\n11-07-2012 – Kris Sayce <\/p>\n

What A Slowing Chinese Economy Means For Pork Chops<\/a>
\n10-07-2012 – Dr. Alex Cowie <\/p>\n

Late News: Bankers Rig Interest Rates, No-One Fired<\/a>
\n09-07-2012 – Dr. Alex Cowie<\/p>\n

\n<\/img><\/a> <\/img><\/a> <\/img><\/a>\n<\/div>\n


\nWhy Mexico\u2019s Economy Could Be One of the Most Attractive Emerging Markets <\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

By MoneyMorning.com.au Enrique Pe\u00f1a Nieto has just been elected president of Mexico.\u00a0 It’s not what you’d describe as a dream job. Mexico’s problems put all our worries into sharp perspective.\u00a0 The most tragic and visible of these woes is the violent drug war. The war against the cartels (as well as infighting between cartels) has … <\/p>\n

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