REVIEW

The Making of El Dorado

An expanding industrial sector and robust services industry underlined 2011. While maintaining strong indicators, Mexico now needs to strengthen its trade ties beyond North America.

Economic progress in Mexico has been underscored of late by the expansion of its industrial sector in 2011. The country’s exports reached an all time high thanks in part to a faster-than-expected recovery in the US, a market to which approximately 80% of all Mexican exports are destined. It is hoped an expansion in industrial capacity, with a focus on high-tech, value-added manufacturing, will reduce Mexico’s reliance on the US. Coupled with the country’s extensive list of free trade agreements (FTAs) involving some 44 countries, the most prominent of which is the North American Free Trade Agreement (NAFTA), the country will develop the internal supply chain and evolve the manufacturing industry away from its “maquiladora” origins.

The country’s GDP came in at $1.15 trillion in 2011, according to IMF estimates. Thanks in part to its liberalized trade policy, “foreign trade now represents around 60% of Mexico’s GDP,” Bruno Ferrari García de Alba, Secretary of Economy, told TBY. In terms of Mexico’s changing economic dynamics, this is a large increase from the 25% share foreign trade represented in GDP in the early 1990s. Exports reached a record high of almost $350 billion in 2011, up 17% on 2010, according to official figures and statistics. This is a continuing growth trend that saw the expand by grow 30% in 2010, “clearly showing that exports have been the main driver of the economy and its recovery,” José Antonio Ardavín, Director of the Organization for Economic Cooperation and
Development (OECD)in Mexico, told TBY. The country now runs a current account deficit, although it is a modest $1.2 billion, with the majority of imports filling in gaps in the internal supply chain.

Weaknesses in the sector stem from the country’s reliance on oil exports for income, as 33% of the federal budget is sourced from the industry. Although the country is the world’s 12th largest economy, its nominal GDP per capita sits only slightly above the global average, at $10,153. UN statistics “show that 45% of the population, or 49 million people, are living below the relative poverty line,” said Kai Bethke, Regional Director for Mexico, Central America and the Caribbean at UNIDO. The government’s push for high-tech industries, including electronics, the automotive sector, and the aerospace industry could kill two birds with one stone, effectively lowering the country’s sensitivity to US demand while also boosting employment and the rate of domestic consumption.

Unemployment currently stands at 4.9%, and inflation sits at a reasonable 3.8%, the lowest rate in over a year as capital inflows strengthen the peso, countering rising commodity prices. Indeed, the country attracted $19.4 billion in FDI in 2011, just under the $20.2 billion registered in 2010. In parallel to development in the country’s industrial base, the government has also poured attention on the country’s transport infrastructure. Inaugurated in 2012, the Baluarte Bicentennial Bridge is surely the crown jewel of Mexico’s road network, and the tallest cable-stayed bridge in the world. Through the construction of 19,000 kilometers of road, it is hoped that the new coast-to-coast connection will open up new areas of the country to economic development, while also promoting the nation as a trans-oceanic link.

GROWTH AREAS

While the Mexican industrial sector makes headlines, having grown to represent approximately 35% of GDP as compared to 31% in 2001, the services sector still represents over 60% of GDP, and agriculture around 4%, according to World Bank data. The hydrocarbon industry, a significant part of the national economy, has also ramped up its activities in recent years, with more than five fold growth in exploration between 2001 and 2012. While the country has 43.1 billion barrels of crude oil reserves, and 691 trillion cubic feet of technically retrievable shale gas, renewable and clean energy is also at the forefront of the Calderón administration’s agenda. Yet, 74% of the country’s electricity generation capacity still relies on oil and gas.

The manufacturing sector, meanwhile, is led by the automotive industry, which accounts for 20% of industrial value. The aerospace industry is working fast to play catch up, though, employing 30,000 people, just under a quarter of the number the automotive sector employs. Growth has been rapid. “Our aerospace industry was almost non-existent a decade ago, but has quadrupled since 2005,” said Carlos Guzmán Bofill, Director General & CEO of ProMéxico. “Industry also experienced 19% compound annual growth for the past seven years,” said Guzmán. “In fact, a plane with Mexican technology takes off every two seconds.”

The private sector is also thriving outside of the industrial sector, and competition has expanded in recent years in seaports, railroads, airports, telecommunications, electricity generation, and natural gas distribution. The National Infrastructure Program (NIP) is a core plan to develop the country’s transport infrastructure. A number of megaprojects have punctuated Mexico’s journey to increase its international competitiveness as a transit hub, including the Durango-Mazatlán highway, a key connector in a corridor linking the Atlantic and Pacific coasts, as well as 115 bridges, including the cable-stayed Baluarte Bicentennial Bridge. The sector has grown in part thanks to the government’s commitment to public-private partnership (PPP) schemes, and the private sector invested more than $22 billion in transport infrastructure between 2007 and 2011.

The construction sector benefitted from the public sector’s commitment to infrastructure in 2011, continuing its recovery from the trough it was in following the 2008 liquidity crisis. In fact, the sector was back in the black following 20 months in the red, growing by 5.1% in 2011, reaching a value of $70 billion. Projects belonging to PEMEX, the state-owned oil and gas operator, accounted for 48% of this value, while the building of housing and multi-use developments represented 16%, and highway construction 12%. In the housing arena, “social” mortgage lenders Infonavit and FOVISSSTE issue six out of every 10 mortgages, and CONAVI, founded in 2005, has also sought to make housing accessible to lower-income segments. Today, “22% of Mexicans live in a dwelling financed by Infonavit,” Víctor Manuel Borrás Setién, Director General of Infonavit, told TBY. Efforts are being stepped up to get even more lower-income families into quality housing, yet a large informal sector still leaves many outside the reach of lenders like Infonavit and contributes to income inequality.

In terms of public priority, the state budget for 2012 calls for $298.3 billion in spending, up 7.9% over 2010, including a deficit of around 2.8% of GDP, according to DOF. While education, highways, agriculture support, and federal revenues received a boost, a freeze was implemented on government hiring—except for law enforcement—as well as wages for mid- and senior-level civil servants, in a nod to global calls for austerity. Spending projects, as well as revenue estimates, are based on the expectation that GDP will grow by 3.6% in 2012, according to Banco de México.

TRADE ON

Of Mexico’s over $350 billion in exports, 80% is destined for the US while 90% is carried out under the country’s numerous FTAs, of which NAFTA remains the most significant. While it is hoped that the development of high-tech industries and a more comprehensive supply chain will lessen the country’s reliance on US economic performance, UNIDO’s Bethke notes that, “Mexico’s greatest advantage is also its greatest weakness, namely its proximity to the US.” However, “the US is still the largest economy in the world, and even if it falls to number two, it will still remain a big buyer.”

Mexico is currently the largest exporter in Latin America, exporting more than Brazil and Argentina combined. Diversifying export markets, though, still remains a priority. “We are looking toward Latin America, Africa, Asia, and some European countries,” said ProMéxico’s Guzmán.

The automotive sector remains one of the largest exporters, with 2.1 million of the 2.7 million units produced in the country exported. Of that figure, 63.5% was destined for the US market in 2011, 15% for Latin America, and 7.4% for Canada. Europe, which is in the sights of the Mexican administration in terms of increasing exports, accounted for just 10.3%. The Secretariat of Economy doesn’t, however, seem to be resting on its laurels, and through the Manufacturing, and Export Services Industries Program (IMMEX) it has gathered almost 7,000 enterprises with the aim of enhancing the export and import process, “hence creating business opportunities, increasing investment flows, and generating better-paid jobs,” said Ferrari.

Mexico’s FDI pull must also not be underestimated, with $19.4 billion attracted in 2011, down slightly by 9.7% over 2010, which had seen a jump from the $17.7 billion invested in 2009. The country has yet to return to the highs of the 2004-2008 period, when an average $24.2 billion was registered, due to slower growth in the US, as well as a crackdown on drug cartels, which has put off some because of security concerns. With Mexico ready to enter an election year in 2012, business leaders will be watching with interest to see where the Mexican story will move next.