Focus: Economy

Eyes on Change

Eyes on Change

Jul. 10, 2013

The country's dependence on the US as a trading partner was once again highlighted in 1Q2013, with GDP growth dropping to 0.8% compared to the same period the year before due to sluggish sales north of the border. Despite blaming the troubles on the early Easter holiday, the government's growth forecast for 2013 has been revised down from 3.5% to 3.1%. The service sector accounts for 62% of GDP, of which wholesale and retail trade (16%) and real estate (10%) are the biggest segments.

President Peña Nieto has been quick to lay out his plans for the future, with much emphasis on the Pacto por México (Pact for Mexico) and the reforms that are expected to result from congressional consensus. Along with challenging informality, which it is estimated could add three or four percentage points to GDP, President Peña Nieto's reforms also promise an overhaul of the state-dominated energy sector, as well as the education sector, which has long been held to ransom by the National Education Workers' Union.

Inflation rose to 4.25% in April 2013, an increase of seven basis points over the December 2012 figure of 4.18%. Mexico's central bank, Banco de México, having already slashed interest rates to 4%, is expected to make further cuts later in the year once inflation follows a steadier course. There was good news in May, however, with the unemployment rate dropping to 4.93% from 5.04% in April, according to national statistics agency INEGI.

TRADE & FTAs

In 2012, Mexico's exports grew 6.2%, well below the 17.1% rise experienced in 2011, but still enough to see the country post its first trade surplus in 15 years—the result was tipped in Mexico's favor by stronger-than-expected non-automobile manufacturing exports in December (up 10.2% compared to the same month in 2011). Imports increased 5.7% over 2012, below the 16.4% growth seen in 2011. Mexico's current account has averaged a deficit of approximately $238.85 million between 1980 and 2013, with the largest monthly surplus posted in March 2013 ($1.75 billion). The country's main export products include automobiles and related products (24%), oil and oil products (14%), and agricultural products (3%). Its main imports are metallic products, machinery, and equipment (50%), mining products (13%), and chemical products (6.3%). Mexico's largest trading partner is by far the US, with almost 80% of the country's exports destined for the country's northerly neighbor. The US is also the source of over 50% of Mexico's imports, with other major trading partners including Canada, China, and Japan. The country's network of free trade agreements (FTAs) is also set to expand from 12, as negotiations continue surrounding the potential Trans-Pacific Partnership (TPP), an expansion of the Trans-Pacific Strategic Economic Partnership Agreement (TPSEP) that involves Australia, Brunei, Chile, Canada, Malaysia, Mexico, New Zealand, Peru, Singapore, the US, and Vietnam. Mexico is also backing Japan as a possible member.

FDI

FDI fell to $12.7 billion in 2012, from an average of around $23 billion over the past decade, according to The Economist, though the Secretariat of Economy put the figure at $13.43 billion. The UN Economic Commission for Latin America and the Caribbean (CEPAL) notes this figure was affected by Spain's Banco Santander listing its Mexican subsidiary, raising $4 billion that was counted as an outflow of FDI. A six-year high was reached in 1Q2013, however, with nearly $5 billion in FDI registered in the country by the end of March. According to the Secretariat of Economy, manufacturing, especially advanced manufacturing, and the food and beverages sector were the most popular investment destinations. The US was the top source of FDI, accounting for almost 50% of all foreign investments made in the country. Other top investors so far in 2013 include Germany, Japan, and Spain. Advanced manufacturing is increasingly attractive to foreign investors, with Volkswagen recently announcing the opening of a $1.3 billion plant to manufacture Audi vehicles. Aerospace is also growing in attractiveness, pulling in $1.3 billion in 2012. “Mexico has positioned itself as one of the most attractive and profitable destinations for business development worldwide," said Francisco N. González, CEO of ProMéxico, adding “there are at least five reasons behind this, including our favorable macroeconomic environment, the existence of a legal and regulatory framework that favors investment, the availability of highly skilled and specialized talent, our strategic location, and competitive production costs."

SECTOR BY SECTOR

Energy sector reform, although currently unannounced, is hotly anticipated in Mexico in 2013. The liberalizing of the extraction industry could bring foreign companies into partnership with state hydrocarbon producer PEMEX, finally allowing Mexico to take advantage of its oil reserves, the fifth highest of any non-OPEC nation. Announced reforms to date include changes to the education system that will promote meritocracy and wrestle control away from the National Education Workers' Union, which has led to underperforming teachers. América Móvil's monopoly-like hold on the ICT sector will also be challenged as part of reforms in the telecoms sector, while increased public spending on infrastructure is expected to boost the tourism sector (worth 9% of GDP) and the industry sector (worth over 30% of GDP)—President Peña Nieto committed to spending $23.6 billion on transportation alone in 2013. Infrastructure development has also been a boon for the construction industry, as housing supply begins to meet demand. New reforms allowing pension funds to invest in real estate could be a golden ticket for the sector moving forward, however.

Mexico needs to post better GDP growth figures if it is to improve living standards, with informality—six in 10 workers work in the informal economy—the largest stumbling block. Boosting education and encouraging increased competition in sectors such as energy and telecoms will go a long way to making the formal sector more attractive, although there is still much to be done if President Peña Nieto's goal of 6% annual GDP growth is to be met.

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