Seeing Stars (and Stripes)

It is a busy time for Mexico’s economy management team. The OECD, in identifying the positives of the economy, listed its open borders, FDI inflows to date, and Mexico’s successful […]

It is a busy time for Mexico’s economy management team. The OECD, in identifying the positives of the economy, listed its open borders, FDI inflows to date, and Mexico’s successful integration in global value chains. Yet now, as that team works to surmount challenges of various altitudes, the greatest peak to scale is on foreign soil. Oil is no longer what it once was, having dented sprawling state concern Pemex and economic growth alike. But grabbing fuller attention of course is the boisterous rhetoric that secured President Trump’s victory late last year. The subsequent unfolding of this saga, and Mexico’s response, may yet determine the outcome of the nation’s 2018 presidential elections.

Capital Punishment

In recent history at least, Washington has never been such a determinant of sentiment toward Mexico, or a source of economic mistrust. To the sound of post-US election knees jerking, the response was swift, as investors pulled around USD6 billion of portfolio cash from notable EMs according to the Institute for International Finance. Yet all is not as gloomy as at first glance given the well-established and tough-to-reverse commercial relations between Mexico and the US, involving complex supply chain dynamics whereby US citizens enjoy cheap Mexican imports.

One resulting impact of a longer-term nature is a likely delay in fiscal consolidation due to the hydra of limited growth, steeper inflation, and a weaker peso. The government plans to shrink public-sector borrowing requirements to 2.5% of GDP by 2018, from just above 3% at time of print. Official figures put gross public debt at roughly 56% of GDP, and its apparent climb since 2010 has rating agencies hovering over the “negative watch“ button.


Time alone will tell if, and to what extent, Trump renegotiates the NAFTA, so vital to Mexico’s economy that it has been forced to contemplate diversifying away from its northern neighbor, which today takes 80% of its exports. Notably, this involves exploring preferred tariffs with Brazil and Argentina, and enhanced access to their manufacturing sectors. By 2015, under NAFTA, exports to the US had expanded more than six-fold since 1993. Bilateral commerce in goods and services between the US and Latin America is annually worth USD1 trillion, where Mexico’s share alone is over USD580 billion. Trump, keen to reduce the US-Mexican trade deficit as close as possible toward zero, has threatened to tax US firms relocating to Mexico, which would dent FDI, while also early on pledging to sequester remittances to pay for his much-vaunted wall.

Meanwhile, the US sugar industry has lobbied hard for a withdrawal from a 2014 agreement setting prices and quotas for US imports of Mexican sugar should NAFTA remain unchanged. In late November 2016, Mexico’s central bank Banxico reduced its 2017 economic growth forecast to between 1.5-2.5% from the earlier 2-3% based on its Washington woes. Moody’s Investors Service, too, has a negative outlook on Mexico’s banking system, given the inflationary climate and limited economic growth, likely to erode disposable income and thus borrowers’ loan appetite and repayment capacity. That said, attesting to Mexico’s economic resilience to prevailing volatility, the IMF in May 2017 reaffirmed Mexico’s qualification for a two-year USD86 billion Flexible Credit Line, which the Mexican government labels “precautionary.“

Making Good on Industry

Victor Esquivel, Managing Partner at KPMG, present in Mexico since 1946, told TBY that “Mexico has enjoyed a great period of macroeconomic stability in public finance (where despite bumps in the road) there has been a clear direction of where the government wants to take (the) economy.“ He notes, too, that “significant sectors such as energy and telecoms have opened, making Mexico more competitive.“

Structural reforms have underpinned this, making Mexico one of the world’s most open markets. Frederic Garcia, President of the Consejo Ejecutivo de Empresas Globales and CEO of Airbus Mexico, pinpointed an obstacle to fully capitalize on such reforms. Because while “the energy reform sought to bring in USD60 billion in foreign investment to Mexico, (the) aerospace supply opportunity is five times higher (…), and less than 15% of companies in the Mexican aerospace value chain are Mexican.“ This will demand greater compliance across the value chain, especially among SMEs, which account for around 90% of production, in order to tap, “global supply chains and better levels of financing, not to mention develop a culture of legality and formality.“ Meanwhile, ProMexico CEO Francisco Gonzalez Diaz recalled how in 2015 the organization had revealed “Mexico needs 1 million senior technicians,“ the point being that, “it is precisely SMEs that offer jobs for these people.“

Buying & Selling

In 2016, Mexico imported USD387.1 billion of goods, up 65.1% since 2009, but down by 2.1% YoY. The top-10 imports accounted for 72.6% of the total import value. Speaking volumes, 49% of total imports by value last year stemmed from the US and Canada, both signatories to NAFTA. Asia supplied 35.5% of Mexican imports, with 11.8% derived from Europe. Imported vehicles drove the increase in value among the top-10 import categories, rising 101.4% for the seven-year period starting in 2009. By performance these were followed by rubber and rubber articles, up 95.8%, machinery including computers, up 83.4%, and plastics, up 74.4%.
Exports for 2016 amounted to USD373.9 billion, up 62.8% since 2009, but down 1.8% YoY. The top-10 exports claimed 79.9% of total shipments. It is telling, too, that Mexico exports 1.7 times the volume of manufactured goods of the other Latin American nations combined. For the year, exports contributed around 16.2% of Mexico’s GDP (USD2.307 trillion) according to the IMF’s World Economic Outlook, down from 17.2% for 2015. The US and Canada claimed an 83.8% stake in total exports by value in stark contrast to the 5.4% of goods destined for European markets, yet higher than the 5.2% going to Latin America and the Caribbean and 5% to Asia. Mexico’s balance of trade averaged at -USD283.85 million from 1980 to 2017, with a historic peak of USD1.7 billion in March 2013 and a record low of -USD3.47 billion in January 2017.

And Closer to Today

The March 2017 trade deficit was USD183 million, in contrast to a USD87.2 million trade surplus the year before, thus disappointing market expectations of a USD950 million surplus. Exports of manufactured products in March advanced 13.9%, while agricultural and fishery shipments rose 4.2%. Incidentally, in 2016, Mexico produced around 3.5 million cars, with 5 million vehicles earmarked by 2020. Notably, exports to the US climbed 11.8%, comprising over 80% of total non-oil shipments, where auto sales, up 17.7%, claimed over 27% of the total. Mexico’s sales to all other markets combined appreciated by 20%. Meanwhile, expanding the trade deficit to USD1.41 billion, imports climbed 2.81% to USD35.06 billion.

Frederic Garcia President of the Consejo Ejecutivo de Empresas Globales and CEO of Airbus Mexico argues that “by 2030, Mexico could be among the top-five exporters in the world (so long as) global companies (…) help Mexican SMEs enter global value chains to help us become more competitive.“ In similar vein, ProMexico’s Francisco Gonzalez Diaz emphasized to TBY that over the coming 20 years, “the market for passenger planes of over 100 seats will reach USD4.5 trillion,“ 70% of which derives from suppliers. Again, given success in establishing adequate value chains, the current 5% of the global aerospace value chain held by Mexico could “reach 10%, (making for) export potential of around USD300 billion.“

Welcome 1Q GDP…

The economy grew YoY by a non-seasonally adjusted 2.8% (seasonally-adjusted 0.7%) in 1Q2017, marking the highest rate in six quarters, fueled by services growth. Stronger industrial output rebounded—later in May 2017, manufacturing confidence printed a seven-month high of 47.5%. GDP growth averaged 2.65% from 1994 to 2017, with a high of 9.2% in 4Q1996 and low of -8.6% in 2Q1995.
…and Other Numerical Currency
By early June, the peso was back on its feet, rallying to 18.23/USD (up 4.1% MoM and 12.1% in annual terms), even a tad higher than before Trump’s November victory. In fact, Moody’s President and Director General Alberto Jones Tamayo told TBY much earlier that the plight of the peso should not curb investment in Mexico. For one, “there is enough financial flexibility for large Mexican companies to switch between financing in one currency or the other relatively quickly.“ And while interest rates in Mexico have begun to rise, “most of the growth and modernization of the industrial platform has been done at interest rates that are much higher yet allowing for a still profitable business.“

FocusEconomics forecasts the peso trading at MXN19/USD at end-2017, and at MXN19.74/USD in 2018. As a result, consumer confidence rose to 84.3 in April 2017, in a sustained recovery from January’s record-low of 69.9. Consumer spending, a true engine of growth, could continue to fuel expansion in the coming terms. Also in May, consumer prices rose 6.16% YoY, exceeding market expectations of 6.15%. Inflation, having risen for 11 consecutive months, and peaking since April 2009, was exacerbated by the cost of housing, utilities, food, and energy, plus an earlier hike in the minimum wage. It remains above the central bank’s 4% upper bound target.
On May 18, 2017, as part of a sustained monetary tightening cycle, Banxico raised the policy interest rate by 25 basis points to 6.75%, the third rise of 2017, marking an eight-year high. This is likely to remain the response to stubborn inflationary pressure. Inflation has averaged at 25.4% between 1974 and 2017, peaking at 179.73% in February 1988 and troughing at 2.13% in December 2015. The central bank forecasts annual inflation declining to 3% by end-2018. Unemployment, though worse than market expectations of 3.2%, slid to 3.5% YoY in April 2017 from 3.8%. It had peaked at 6.42% in September 2009 and troughed at 2.22% in March 1997.

Mexico has the advantages of a strong manufacturing base, and its well-established industrial structures in place with US industry would be a risky venture to reverse. Meanwhile, despite the braking effect of macroeconomic prints, the government remains committed to fiscal consolidation when conditions permit.