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Mexico 2014 | ECONOMY | REVIEW: ECONOMY

Despite decelerated growth in 2013, the Peña Nieto administration is busy reforming key segments of the economy to facilitate the augmentation of vital trade relationships.

In mid-June 2012, President Obama formally invited Mexico to take part in the Trans-Pacific Partnership, a broad-based trade agreement that would unite rapidly growing markets on either side of the ocean. Though negotiations for accession to the TPP are ongoing, with the most recent taking place in Toluca, Mexico, the concept represents a natural expansion of the country's commercial relationship with its powerful northern neighbor, with which the country conducts the vast majority of its trade, and of trading with East Asian markets. Mexico has been a partner in the North American Free Trade Alliance (NAFTA) for 20 years, over the period developing a robust open trade policy and fostering its economy, one of the most auspicious in the world. Two decades on, Mexico is on the cusp of revolutionary reforms in energy, industry, finance, and transport, while working on restructuring its foreign trade pacts.

LINKED IN

Mexico maintains 12 free trade agreements (FTAs) with dozens of countries, having adopted a liberalized trade model in the early 1990s. It has entered into FTAs with most countries in Latin and North America, and joined Japan, Israel, and the EU in separate agreements in 2002, 2000, and 1997 respectively. Since 1996, Mexico's exports have grown from $91.8 billion to $349 billion in 2012, with between 70% and 80% of this activity being conducted with the US. Its northern border is over 3,000 kilometers in length, and exports traverse the boundary by way of an established and expanding rail and road network. The opening up of the world's largest market to Mexican goods following the implementation of the NAFTA agreement has provided a major boost to exports. The US imported $280.5 billion worth of goods from Mexico in 2013, up 603% since 1993, and the goods trade deficit between the two countries $54.3 billion in that same year. Mexico is also a founding member of the Pacific Alliance, a trade bloc that counts Colombia, Chile, Peru, and soon, Costa Rica, as members. Founded in 2012, Mexico held the presidency in a pro tempore capacity in 2014. Meanwhile, the country's internal market—estimated to be over 120 million people in 2014—offers a significant domestic consumer network.

FDI into Mexico reached $38.28 billion in 2013, with the bulk of capital invested in the manufacturing sector, followed by mining, trade, and temporary lodging services. Half of this investment was new, with the overall figure representing a 178% increase on the amount initially stated for 2012, according to the Ministry of Economy. This considerable increase is largely the result of attractive incentives such as the IMMEX program, which covers general import tax, value-added tax, and countervailing duties for manufacturing firms importing equipment temporarily to produce foreign goods, and tax credits of 30% of total spending for R&D activities.

THE LONG GAME...

Mexico has shown strong macroeconomic stability in recent years, moving up to within the top 50 countries in the Global Competitiveness report by the World Economic Forum. Economic growth slowed in 2013, however, initially as a result of the post-electoral uncertainty in 4Q2012 and 1Q2013, and in anticipation of the new government's sweeping policy reforms. In its first year in office, the Peña Nieto administration focused intently on pushing through its new legislation while its Institutional Revolutionary Party (PRI) maintained a majority in Congress, paying less attention to the short-term concerns of businesses.

The reforms may take time to show results, but will create a more productive environment for entrepreneurs and the business community. The basis of financial reform is the extension of access to credit for individuals and small businesses, the latter of which are responsible for 75% of all employment in Mexico. Periodic reviews of banks to ensure that they are lending enough, the legal codification of Basel III regulations, more freedom for the operations of the Development Bank, and the simplification of the process of changing banks and discouragement of binding conditions will all contribute to increased competition in the sector.

...A NUMBERS GAME

Other reasons for the poor performance was the negative housing sector seriously affected growth in the construction sector, which represents approximately one-fifth of the economy. “Internationally, moderate growth in the US, the slowing of productive activity in various emerging economies, and observed volatility in international financial markets were some of the factors that caused a decrease in the rate of expansion of external demand for the export products of Mexico," explained Ildefonso Guajardo Villareal, Secretary of Economy, in conversation with TBY. Growth dropped to 1.1% over the year, in contrast with higher figures of 5.1% in 2010, and 4% in 2011 and 2012. Mexico's GDP for 2013 was $1,260.91 billion. More recently, GDP grew by 2.7% in 2Q2014 in comparison with 2Q2013, and available data suggested a continuation of positive growth trends in the third quarter. Expectations for real GDP growth in 2014 remain at 2.7%, according to the Secretariat of Finance and Public Credit.

Inflation reached 3.8% in 2013, down from 4.1% in 2012. The figure has been fluctuating around this mark since 2009 when inflation was 5.3%. The Banco de Mexico predicted that financial reforms would create a temporary rise in inflation in the early part of 2014, with adverse effects dampened in the second half of the year. On the whole, the volatility of inflation and the carrying over of inflationary effects on consumer prices has diminished in recent years. According to Oanda, the Mexican Peso to US dollar exchange rate averaged at Ps13.0333 over the period from July 2013 to August 2014. Unemployment figures throughout 2014 have hovered around the 5% mark.

TIME FOR CHANGE

Other reforms will have a striking effect on the economy. The congressional decision to privatize state oil reserves has sparked much interest from abroad. For three quarters of a century a state monopoly has kept foreign investment in the sector at bay. A direct result of the reform was Mexico receiving a Moody's Long Term Foreign Currency rating of A3 in 1Q2014. Similarly, S&P and Fitch upgraded the country's credit rating to BBB+ over the course of 2013. Broad macroeconomic stability is another reason for better evaluations. A lack of solvency issues with other countries (public debt represents 43.5% of public GDP) indicates an even balance. When energy reform becomes fully realized, higher oil production will lead to increased tax revenues, while income from PEMEX, the state-owned petroleum giant, will continue to flow.

At the same time, recommendations have been made to correct apparent challenges to the economy. Foremost among these is the considerable informality of the domestic market, a situation which must be undone if sustainable, long-term economic growth is to be reached. The financial reforms will go some way to bringing citizens into the formal economy, but broadening the tax base will remain necessary if the country's human capital is to be sufficiently developed to reduce poverty and create formal employment. A key element in improving human resources is the reform of the education system, a process that is underway at present, but remains partially restricted by a testing dialectic with the major teachers unions, such as the Mexican National Educational Workers Union (SNTE), which are largely rejecting the reform package. The reform itself stipulates test-based hiring of teachers managed by federal authorities to undermine the union's traditional control over human resources in educational establishments, which authorities blame for poor results and relatively expensive running costs.

PACT HOUSE

All of the current government's moves toward a more formalized economy and the various reforms pursued over the past two years had been outlined in the Pact for Mexico, a document signed by the country's rival political parties in December 2013. It calls for a broad restructuring of the nation, to make it more inclusive of all segments of society, and for a reduction of the high levels of inequality among its citizens. Fundamental social welfare initiatives, such as universal social security and unemployment benefits, as well as improving school attendance and providing more scholarships and equipment such as laptops to students, aim to improve the lot of those who will benefit most. A wider framework for the protection of cultural patrimony is also envisaged, and the rights of indigenous communities will be expanded. In addition, new mining laws and changes to PEMEX will ensure a more sustainable approach to the issue of climate change, while agricultural production will also be made more productive. Finally, a more robust framework for victims of criminal activity is planned with the hope of defending human rights more effectively.

The Peña Nieto government has created the ideal conditions for sustainable growth. This will foster the development of the nation through its grand schemes and groundbreaking reforms. A steady, structured transformation is taking place, and with political parties unified over the Pact for Mexico, the advancement of its stated goals should play out consistently for years to come. And through its growing international presence in blocs and organizations, exports and trade will continue to develop, across borders and oceans alike.