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 Business News | May 2007 
Mexican Resilience Increasing
 Stephen S. Poloz - Canadian Transportation & Logistics
Mexico has come a long way since the so-called Tequila crisis of 1994. Nowadays, Mexico gets caught up in global volatility just like everyone else, but is on the resilient end of the spectrum.
Consider how Mexico weathered the last couple of emerging market storms. In May of 2006, emerging markets retreated on evidence of slower global economic growth, declining commodity prices and rising international risk. The average emerging market bond spread widened by over 50 basis points, but Mexico’s rose by only 37. Mexico’s stock market fell by 18%, whereas Brazil fell by 26%. And, the Mexican peso fell by only 4% while Brazil fell by 16%.
The episode of February 2007 was similar, when global markets convulsed in response to a signal from China’s monetary authorities that they were very serious about engineering a growth slowdown. The average emerging market spread rose by 21 basis points, Mexico’s by 16; Mexican stocks fell 6%, Brazil by 8% and China by 9%. In both episodes, Mexico’s experience was closer to that of stalwart Chile than to the rest of the riskier emerging market universe.
What is the source of this increasing resilience? A central factor has been improved monetary policy. Inflation has averaged 4.4% in the past five years, as compared to 13.8% in the preceding five years. The Mexican economy is showing signs of slower economic growth in the wake of the U.S. slowdown, with growth forecast at around 3.0% for 2007, down from 4.8% last year. Even so, the central bank raised interest rates in late April in response to concerns about emerging inflation pressures related in particular to higher corn and tortilla prices. Willingness to fight inflation even when the economy is slowing is very reassuring to international investors.
It is the faith of international investors that has pushed Mexico’s stock market to near-record levels and bond spreads to record lows. Inbound direct investment has exceeded Mexico’s current account deficit every year for the past six years. Ratings agencies have promoted Mexico to investment grade, most with a positive outlook. External debt is now running at 20% of GDP, as opposed to nearly 50% 10 years ago. Exports have risen on average by 16% per year during that 10-year period. Government efforts to improve transparency, reform government pensions and to improve access to home ownership by consumers have contributed positively, too.
A solid report card, but there are medium-term vulnerabilities. A key one is that Mexico still depends heavily on oil, yet crude output is declining by about 5% per year and reserves now are estimated to be about 10-years’ production. However, the national oil company, PEMEX, is unable to make the investments required to maintain production since oil proceeds account for 35-40% of government revenues and are mostly spent. This puts Mexico’s long-term fiscal plans in doubt – more reforms are needed, and international investors will zero in on this eventually.
The bottom line? Mexico is headed for slower growth, along with other emerging economies. Improved fundamentals should make for a smoother ride than in past episodes, but Mexico’s long-term reform plan remains critical to its international competitiveness and continued success.
Stephen Poloz is Senior Vice-President, Corporate Affairs and Chief Economist, Export Development Canada. His column on trade related issues appears weekly on www.ctl.ca. |
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