Thomas White Global Investing
Investors warm up to the new Mexican wave
Mexico stamp
February 15, 2013
A Postcard from the Americas
Investors warm up to the new Mexican wave

Mexico City

Among other important policy moves, the new president has outlined his intent to overhaul the country’s education system, which is badly in need of reform.

Not so long ago, Mexico, with its endless saga of drugs-related violence, was considered an “economic basket case,” appearing on the radar screens of the global financial community whenever Carlos Slim topped the rich men’s list. However, the Latin American economy, long overshadowed by its bigger neighbor Brazil, seems to be waking up to a new dawn under the inspiring leadership of its recently elected president.

Mexico may want to leave its patchy past behind it, but turning the pages of its economic history reveals the giant strides the country has made in recent years. Typically, investor interest in Mexico has centered around its status as a manufacturing backyard for companies to export their wares to the United States. But China’s rise as the world’s factory has taken some wind out of Mexico’s sails in that area. Moreover, after signing the North American Free Trade Agreement (NAFTA) in 1994, Mexico started benefiting from tariff-free transactions between itself and the U.S., as well as Canada. However, the financial crisis of 2007-2008 derailed the United States, pulling down the likes of Mexico in its wake.

However, as The Economist has pointed out, things started looking up for Mexico in 2011 when it grew faster than Brazil. Now Mexico has repeated the feat for 2012. In fact, Enrique Pena Nieto, the new president, has said that he hopes to raise the country’s annual growth rate from about 4% now to 6% before his term ends. The Economist reckons Mexico may figure among the world’s ten biggest economies by the end of this decade.

This dramatic turnaround can be traced to a number of economically important developments — such as the surge in oil prices since the beginning of this century and ironically enough, the China factor again. Given the rising cost of transporting goods from Asia to America, it is increasingly making business sense for companies to set up base in Mexico, rather than in China, India, or Vietnam. What’s more, China no longer has a big advantage in terms of cost arbitrage as wages there have been growing rapidly while pay increases in Mexico have been modest.

The Latin American country, which shares a 2,000-mile border with the United States, exports BlackBerrys, refrigerators, and flat screen televisions to its neighbor up north. By some estimates, Mexico will become the top exporter to the U.S. in a decade or so. Thanks to the economic awakening, the flow of immigrants to the more prosperous neighbor has reduced to a trickle. On the contrary, more and more Mexicans are heading home as America’s jobless rate remains double that of Mexico. Further, over the long term, falling fertility rates in Mexico are expected to bring down the number of potential immigrants to the U.S.

Amid the barrage of positive news for the Mexican economy, the election of the new president has proved to be the icing on the cake. Though Pena Nieto represents the Institutional Revolutionary Party (PRI), a party known for its authoritarian style of governance in the past, the new incumbent, it seems, has taken to his task in the right earnest. A meeting with President Obama recently has set the stage for greater cooperation between the two economies in the near future. At the outset, Pena Nieto has said that his priority would be to speed up the economy to bring down poverty levels.

The president has also set his sights on introducing reforms in the corporate sector, hinting that he will promote competition in sectors where monopolistic businesses dominate, such as telecom, cement manufacturing, television broadcasting, as well as food and drink. State-owned oil company Pemex, which generates a third of the government’s revenues despite witnessing falling production in recent years, may also undergo a bit of pruning if the president has his way. Still, drugs-related violence, though much subdued, remains a serious problem for the country.

Foreign investors such as Japanese car maker Nissan and oil companies eager to explore in the Gulf of Mexico have lined up big plans for the Mexican market. But their success will depend much on the implementation of ground-level reforms proposed by the new president. Over to you, Mr. Pena Nieto.


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