Download Presentation: A Tale of Two Mexicos: Growth and Prosperity in a

A tale of two Mexicos:
Growth and prosperity
in a two-speed economy
Jaana Remes
McKinsey Global Institute
July 15, 2014
CONFIDENTIAL AND PROPRIETARY
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Is this finally Mexico’s moment?
Countries like Mexico, where the
economy is more balanced, are
potential bright spots.
Welcome to the A-club. Yesterday,
Moody's upgraded Mexico from
Baa1 to A3. . .
Pepsico said it would spend
$5 billion in Mexico over five years
Nestle said it planned to invest
$1 billion in Mexico over five years…
..upgrade into the ‘A-Class’ rating…and…disciplined,
market-friendly, non-interventionist
policies…positively differentiate Mexico from
other large EM economies… .”
– Alberto Ramos, Goldman Sachs
It is an economic renaissance in
Mexico,… ‘‘We are attracting
investments that 10 years ago went
to China,’’ says Finance Minister
Luis Videgary.
“If I were 22 years old and I didn’t know
what I wanted to do, I would move to
Mexico right now because I think the
opportunity is huge there.”
–Laurence Fink, CEO BlackRock
SOURCE: The Economist; Financial Times; The New York Times; analyst reports
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Despite NAFTA and reforms, Mexico has not raised
its average productivity in 30 years
GDP per hour worked
2012 purchasing power parity dollars
19
18
17
16
15
14
13
12
11
10
9
8
7
6
-0.1%
p.a.
+0.8%
p.a.
+3.3%
p.a.
Desarrollo
estabilizador
Excess
boom
Lost
decade
NAFTA
0
1950
60
70
80
90
SOURCE: Conference Board Total Economy Database 2013; McKinsey Global Institute analysis
2000
2012
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Population growth, not productivity has fueled Mexican GDP growth
Contribution of labor inputs and productivity
increases to GDP growth, 1990-2012
Compound annual growth rate, percent
9.3
9%
Labor
input
contribution1
6.6
2.7
3.0
72%
60%
28%
40%
Mexico
Brazil
5.0
5.3
31%
50%
69%
Peru
33%
91%
67%
50%
Chile
Labor
productivity
contribution2
India
China
1 Higher labor input reflects increased population and changes in participation and employment rates; calculated as a residual
2 Labor productivity growth is measured as real GDP per employee
SOURCE: Conference Board Total Economy Database 2013; McKinsey Global Institute analysis
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Without a boost in productivity, Mexico’s growth will
slow further to 2% per year
Annual real GDP growth rates
Percent
3.5
3x
1.5
2.0
1.2
1x
0.8
Expected
Avg. labor
Business as
growth from
productivity
usual GDP
increased labor growth1990–12 growth
inputs, 2012-251
Required growth
from labor
productivity,
2012–25
GDP growth
target
1 Driven by additional workers joining the workforce due to demographics and increased participation in workforce,
employment rate assumed constant at 2012 level
SOURCE: ENEO, INEGI; McKinsey Global Institute analysis
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Behind flat performance is a widening productivity gap
between large modern and traditional businesses
1999
2009
Value added per occupied person
$ thousand, constant 2003 $
Compound annual
growth rate,
1999–2009 (%)
44
+5.8
25
-6.5
7
Number of employees
Share of
employment
%
1999
2009
13
14
+1.0
4
≤10
39
42
11–500
>500
41
20
38
SOURCE: Censos Económicos 1999, Censos Económicos 2009, Instituto Nacional de Estadística y Geografía;
McKinsey Global Institute analysis
20
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3 key levers to boost productivity
growth across the economy
▪
Help traditional enterprises evolve
into modern, formal SMEs
▪
Expand access to capital, particularly
for midsized companies
▪
Continue to make Mexico a place
where world-class companies prosper
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High cost of formality and poor enforcement discourage growth
28%
Social security cost of formal
workers – avoided by informal hiring
11th
Mexico’s rank on labor laws
restrictiveness among OECD countries
after the 2012 reform
7x
Cost of starting a formal business in
Mexico vs. the US (as a percentage of
average income)
73%
Electricity cost premium for commercial
users vs. the US. small businesses pay
80% subsidized residential rates
SOURCE: OECD; Doing Business, World Bank; McKinsey Global Institute analysis
Companies
therefore stay…
▪ Small
▪ Informal
And they…
▪ Grow fragmented
▪ Limit geographic
expansion
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3 key levers to boost productivity
growth across the economy
▪
Help traditional enterprises evolve
into modern, formal SMEs
▪
Expand access to capital,
particularly for midsized
companies
▪
Continue to make Mexico a place
where world-class companies prosper
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Households and small businesses pay a large interest premium
USA
Mexico
Interest rates of different forms of debt
In percent per year
BBB rated 10 year
corporate bond1
10 year
government bond
Housing mortgage
SME loan
Consumer credit
Microcredit
3-4
3-4
~2
~5
~3
~12
~3-4
~20-25
~8
~27-62
~8-15
~70
~+60 pp
1 PPL Energy Supply LLC in the US and Banco Santander de México in Mexico
SOURCE: Bloomberg; Banco de Mexico; national sources; McKinsey Global Banking Pools; McKinsey Global Institute Financial Assets database;
McKinsey & Company
McKinsey Global Institute analysis
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Access to capital is limited relative to other emerging economies,
with particularly wide gap in loans
Financial depth, 2013
Stock of debt and equity as % of GDP
447
89
130
116
34
11 7 7
13
13
38
39
54
32
Russia
Mexico
134
33
4 1
25
71
Turkey
201
201
47
61
8
68
5
29
9
48
73
55
India
Brazil
227
17
9
22
44
332
26
43
13
14
79
179
135
China
83
S. Africa
SOURCE: McKinsey Global Institute Financial Assets database; McKinsey Global Institute analysis
Government bonds
Nonfinancial
corporate bonds
Financial institution
bonds
110
Equity
143
Loans
Advanced
economies
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3 key levers to boost productivity
growth across the economy
▪
Help traditional enterprises evolve
into modern, formal SMEs
▪
Expand access to capital,
particularly for midsized companies
▪
Continue to make Mexico a place
where world-class companies
prosper
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Concluding thoughts
1. Closer North American integration
has dramatically improved the
performance of some industry
segments
2. The biggest challenge is to
jumpstart Mexico’s domestic
business growth engine to raise
productivity and incomes among
SMEs
3. There is plenty of room to boost
productivity and continue to expand
modern segment – more than
enough to meet growth targets
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Thank you
This report and other MGI research
are available at
www.mckinsey.com/mgi
@JaanaRemes
@McKinsey_MGI
McKinsey & Company
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