Peering Beyond the Noise

Mexico's diversified economy has recently seen lower growth, and while exports predominantly cater to the US market, they may need to crank up in other markets.

The economy of 80% urbanized Mexico boasts carbon and non-carbon components, the latter including vibrant automotive, aeronautics, and IT sectors. And while political noise is par for the course around general and presidential elections, we opt not to comment here. Other factors are more pressing, after all, and for a nation with more trade agreements than any other, at 46, the fate of a renegotiated deal with Washington bears greater weight. Overall, however, we note an economy broadly in motion, and one that features numerous opportunities for foreign investment across the industrial matrix, and notably in energy.

Social Conditions, Employment, and Opportunities
Mexico’s population is around 124 million, and its Gini coefficient, at 0.46, is uncomfortably the second highest among OECD countries. Yet, in a TBY interview, Emilio Uquillas, the Country Representative of the Development Bank of Latin America (CAF), noted that “Mexico, in terms of public policy, has created an adequate framework to increase private investment, a powerful tool to fight poverty considering the sustainable income-generation activities developed, which reduce the dependence on public expenditures.” Notably, Mexico’s production and export volumes match those of Latin America overall. Meanwhile, Wanda Sevilla Krieb, the General Director of human resources consultancy Spring Professional warns of a looming shortage of key-sector talent necessitating expat hiring. The shortfall, she maintains, is in the automotive industry, and broad IT sector, where “there is a great demand for technological profiles not only in digital, but also in programming and architecture.”

Sending it “home”

Mexican’s remittances reached USD2.7 billion in April, up 17.9% YoY, fueled by a cash-tastic 13.1% MoM rise in electronic transfers. Remittances printed a historic high of USD29.6 billion in the 12M to April, up 7.3% from the previous 12M period. In fact, the sterling 18% rise in remittances over the five years to 2017 may be contrasted with the leaden drop in oil revenues from both crude and refined products of 68% for the period.

Banxico Scoping Inflation

When fishing for an immediate sense of the economy where better to look than the monetary policy of Mexico’s central bank, Banxico. At its May 17 meeting the bank acknowledged the somewhat encouraging inflation trajectory, where 1Q2018 declines in both headline and core inflation reduced year-end expectations to just shy of 4%. This equates to the upper bound of Banxico’s target, while medium-and long-term expectations are at roughly 3.5%. It enabled Banxico to retain a policy rate of 7.5%, allowing the economy, and consumption, a little more leg room. Yet stressing a wait-and-see mode, the bank asserted that monetary tightening could resume should low inflation be jeopardized by peso depreciation versus a rallying greenback.

Data from the National Statistics Institute (INEGI) put 1Q2018 economic growth at 1.3% YoY, marginally down from 1.5% in 4Q2017. This marked the lowest performance since 4Q2013, mainly weighed down by sluggishness in the industrial and services sectors. Yet when discounting Easter’s toll on working days, despite higher US factory demand, quarterly annual growth was actually at 2.3%. The industrial sector felt its fourth consecutive quarterly decline, notably as extractive sectors contracted. We note though, that quarterly construction activity may have reflected a familiar public spending fueled rise ahead of elections. In March, capacity utilization reached 81.2%, almost flat MoM, having peaked historically at 82.5% in November 2017, and troughed at 74.1% in February 2009, and averaging at 79.46% from 2007 to 2018. Banxico forecasts economic growth of 2-3% this year and 2.2-3.2% the next.

Trade and the US Factor
Over 60% of Mexico’s GDP derives from foreign trade, and much will depend on the state of global economic growth, which at around 3.1% for last year and this, is set to decline through 2020 according to IMF estimates. In Mexico’s own economic class, namely emerging market and developing economies (EMDEs), growth is projected to plateau in 2019 and 2020 at 4.7%, up from 4.5% this year. Fernando Ruiz Huarte, CEO of the Mexican Business Council for Foreign Trade, Investment, and Technology (COMCE), argues that Mexico needs to capitalize more on its plethora of foreign trade partnerships given wobbly relations with its key economic partner to the north. “The high rate of dependence on exports to the US, which is 80% exports and 50% imports, is not sustainable.” Citing the automotive sector, where Mexico excels, he observes that “We are one of the seven largest producers and exporters in this industry in the world. The exports go mainly to the US, which demonstrates the importance of NAFTA, and we are starting to export more to Brazil, Latin America, and Europe.” To this key export list may be added both fresh and processed foodstuffs, metal, and electronics.

Shipping it Out…
Among exports, 85% stem from manufacturing, with 82% destined for the US and Canada. Exports rose to USD37.18 billion in April 2018, up 17% YoY. Non-oil sales—93% of total exports—were up 15% at USD34.59 billion. There were rises for manufactured products (14.9%), notably steel products (37.4%), machinery and special equipment (21%), automotive (19.9%), and food, beverages, and tobacco (12.6%). Agricultural exports were also fertile, up 13.9%. Non-oil trade to the US, at over 80% of total sales, climbed 10.7%, while exports to the rest of the world soared 35.4%, floated on autos sales, up 95.3%, with sales of other products gaining a neat 16.5%. Official data points to a surprise USD289-million merchandise trade deficit in April on robust imports, disappointing market expectations of a USD500-million surplus.

...And Shipping it in
Imports went north by 21.4% YoY in April 2018 to USD37.47 billion. Notably, oil purchases soared 48.7% to USD4.27 billion, with non-oil imports appreciating 18.6% to USD33.2 billion. The culprits were intermediate goods, consumer goods, and capital goods, respectively up 20.0%, 26.1%, and 25.8%. The nation had seen a current account deficit of 1.5% in 2017.

Investment – PPPs and Beyond
In 2018, as in the year before, Mexico ranked 49th among 190 countries in the World Bank’s Ease of Doing Business ratings, albeit down from 47th in 2016. In the negative column, the World Bank notes more costly business construction permits. However, on the plus side, it notes more reliable electricity supply supported by smart meters and remote restoration of interrupted power. Many deals await investors involving the PPP model, the mechanism for which has been in place since 2012. Sergio Forte, Deputy General Director for Investor Relations at state-owned development Banco Nacional de Obras y Servicios Públicos (Banobras), notes the scale of current investment potential in the infrastructure and energy sectors. Yet, “we still have many projects in other sectors such as transportation (and) hospitals.” He notes, too, government plans to achieve 92% internet coverage nationwide within six years, while another opportunity is “Mexico City’s New International Airport, an investment of more than USD13 billion.”

The post-election quarter of this year will allow observers to gauge likely economic performance for the year ahead. Meanwhile, the hawk-eyed central bank is ready to intervene should macro conditions merit a tightening move.