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Mexico’s Economic Outlook Animesh Ghoshal DePaul University Presented at US-Mexico Chamber of Commerce April 28, 2015 Mexico’s Economic Outlook • Mexico in 1982 • Integration of US and Mexican Economies • Concerns about China • Recent reforms • Prospects Economic Situation in Mexico, 1982 Inflation 58.9% Foreign reserves, in months of imports 0.58 Debt service as % of exports 53% Debt service as % of GDP 9.7% Trade in goods as % of GDP 24% GDP, constant 2005 US $ $507 billion GDP per capita, constant 2005 US$ $6914 Economic Situation in Mexico, 1982 and 2014 1982 2014 Inflation 58.9% 4.0% Foreign reserves, in months of imports 0.58 4.38 Debt service as % of exports 53% 10%* Debt service as % of GDP 9.7% 3.4%* Trade in goods as % of GDP 24% 61%* GDP, constant 2005 US $ $505 billion $1042billion* GDP per capita, constant 2005 US$ $6914 $8519* Linkages with World Economy and US • Mexican peso most heavily traded emerging economy currency • 70% of banking system assets in foreign owned banks • Large portfolio inflows since 2010, since inclusion in World Government Bond Index Citibank • Manufacturing sector highly integrated into US supply chain • 80% 0f goods exports go to US • More than 50% of stock of foreign investment (FDI and portfolio) held by US entities • Significant Mexican FDI in US • America Movil (Tracphone) • Cemex (Ready-Mix) • Grupo Bimbo (Entenmann’s) Integration of US and Mexican Economies: GDP Growth Rates 8 6 4 2 GDP growth Mexico -2 -4 -6 -8 2014 2013 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 1992 1991 1990 0 GDP growth United States Correlation between US and Mexican growth Pre-NAFTA Post-NAFTA Real GDP 0.02 0.87 Manufacturing Output 0.11 0.75 Investment 0.16 0.75 Consumption -0.26 0.76 US Imports/Mexican Exports -0.04 0.92 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 US Trade with Mexico 350000 300000 250000 200000 US imports 150000 US exports 100000 50000 0 Concerns about competition from China • China joined WTO in 2001 • Faced reduced trade barriers • Very low labor cost • In 2003, hourly labor cost in manufacturing in China $0.62 • in Mexico, $5.06 • China surpassed Mexico in US imports in 2003 • Many maquiladoras shut down or moved to China, but… • Wages in China have been rising rapidly (10-20% a year since 2008) • In 2012, hourly labor cost in manufacturing in China $3.60 • in Mexico $6.36 And labor cost not the only cost 2014 2013 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987 1986 1985 US Imports from Canada, China, Mexico 500000 450000 400000 350000 300000 250000 Canada China 200000 Mexico 150000 100000 50000 0 “Labor Arbitrage” and Manufacturing Costs Manufacturing Outsourcing Cost Index (Percentage of US Cost) 2005 2010 2015 (forecast) Mexico 89 83 86 China 79 90 98 India 78 82 83 US “Vertical Integration” with Major Trading Partners, 2012 Exports ($b) Imports ($b) Total Trade ($b) Canada 292 324 616 Percentage of US Content in Imports 25% China Mexico Japan 110 216 70 425 277 146 535 493 216 4% 40% 2% EU-27 265 380 645 2% Recap of recent economic history • Macroeconomics very good • Inflation low (3.1%, and close to target of 3%) • Public finances healthy: budget deficit 3.6% of GDP in 2014, and expected to fall; public debt less than 50% of GDP • Well integrated into international financial market • External situation generates confidence • Current account deficit 2.3% of GDP; debt service easily managed • But economic growth disappointing • Real GDP only doubled in 30 years, and smaller increase in per capita income • Problem lay in microeconomics • Until recently, no public consensus on necessary steps • But in last 2 years, a number of reforms enacted by government Structural reforms since 2013 • Reforms enacted in last two years should have significant impact on growth: • Energy • Telecommunications • Finance • Competition • Education • Budgetary Energy reforms • Most significant reforms in 75 years • Constitution amended to end PEMEX monopoly of oil and gas • Private sector • can enter exploration and drilling for oil, with production sharing • can participate in natural gas distribution • Comision Federal de Electricidad (CFE) to face more competition • Private participation allowed in electricity generation • More autonomy for PEMEX and CFE • Expected impact through • Higher oil and gas production • Oil output has fallen from peak of 3.5 mmbd in 2004 to 2.4 mmbd, and without reforms Mexico would become oil importer by 2024. Already net importer of natural gas, as output has fallen • Lower electricity rates (currently much higher than in US) • Should help manufacturing • New FDI into energy industries Telecommunications reforms • Sector opened to foreign investment • New regulatory agency, IFETEL • Power to impose asymmetric rules on dominant firms • Objective: to increase competition • Major investment program to improve internet connections • Studies (elsewhere) found broadband internet access contributes significantly to economic growth Financial reforms • New mandate for development banks • Extending credit to SMEs and agricultural sector • Consolidated supervision for financial conglomerates • Bankruptcy process streamlined • In case of default, orderly allocation of assets • Easier for consumers to switch banks • Improved reporting to credit bureaus • “Financial deepening”: ratio of bank credit to GDP—important driver of economic growth • Mexico currently behind median figure for Latin America • Reforms expected to close gap Other reforms • Competition • Many sectors of Mexican economy tight oligopolies • Pharmaceuticals • Retailing of imported consumer goods • New anti-trust rules should ease entry • Education • Poor quality serious weakness in Mexican economy • Reforms seek to improve quality of teachers (appointment, evaluation, promotion). But strong opposition from unions. • Should increase human capital and productivity in long run • Budgetary • New Fiscal Responsibility Law • • • • Clear targets for public sector borrowing Limits on growth of current expenditures Sustainable path for public debt Stricter control on expenditure, avoiding overruns Vulnerabilities • Integration into global economy provides benefits, but also increases exposure to external shocks • Even with flurry of free trade agreements, Mexico remains extremely dependent on US • Severe recessions in 2001 and 2009, could happen again • “Taper tantrum” following Bernanke’s statement in May 2013 • Peso rapidly fell by 9% against dollar • Capital inflows a sign of confidence, but also increases risk • Foreigners now hold 55% of sovereign bonds, and 37% of peso denominated public debt • Reduces funding cost for government and business • But danger of capital flow reversals and volatility of asset prices Comparison with other major countries in Latin America (most recent data) GDP growth Inflation 3.1 Budget balance (% of GDP) -3.4 Interest rate on 10year govt. bonds 5.66 Mexico 2.6 Argentina Brazil Chile Colombia 0.4 -0.2 1.8 3.5 30.0 8.1 4.2 4.6 -3.1 -5.3 -2.0 -2.1 na 12.51 4.54 6.68 Venezuela -2.3 68.5 -15.9 11.03 Conclusion • Even with risks as noted, prospects good • Prudent macroeconomic policies • Foreign currency reserves of $190 billion should provide adequate buffer against external volatility • Microeconomic reforms finally enacted (though implementation not yet known) • In the last two presidencies, reforms proposed by PAN government opposed by PRI, leading to deadlock • Now apparent political consensus, and proposals of PRI government supported by PAN • So: economic outlook is bright!