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Mexico’s Moment

Apr 13, 2012 Written by  Oscar Montealegre, Contributor

98244511Mexico has made the headlines for many reasons: violence, drug trafficking, mafias, cartels, massacres, police brutality, corruption, and civilian deaths. Much destruction has been caused–especially in the northern region–creating a situation akin to the drug wars that plagued Colombia pre-President Santos. Yet, beneath this unfortunate rubble, Mexico is extremely important in the ever-changing landscape of the Americas and emerging markets.

Mexico’s GDP has seen impressive growth since early 2010. Mexico announced in November 2011 that its economy grew at a rate 3.75 percent year to date, continuing its momentum from the prior quarters. In the third quarter of 2011, the GDP expanded by 4.5 percent. Also, Mexico’s Foreign Direct Investment (FDI) raised a few unexpected eyebrows, totaling close to $31 billion in 2010–a billion more compared to 2009. These are astonishing figures, considering violence in Mexico has escalated instead of subdued during this time period.

So what exactly does this mean? First, historically, from 2004 to 2011, Mexico averaged an annual GDP of 2.43 percent; therefore, the historical average is being surpassed by more than 50 percent–signs of economic stability and future growth. Second, many investors (albeit not all) are not being deterred from investing in Mexico despite the gross violence. They see Mexico as a tremendous opportunity, especially due to proximity to markets in the U.S., Canada, Central and South America. Third, Mexico reinforces the notion that emerging markets are en vogue. As Europe averts economic disaster on a weekly basis and the U.S. enters the drama of presidential elections, markets such as Mexico are positioning themselves in the new international economy, where Asia, Latin America, and maybe even the Middle East play a pivotal role.

A quick glimpse at Mexico’s capital and currency markets can offer an idea of Mexico’s resurgence. As of late, the Mexican peso has been holding up against the U.S. dollar. Another attraction for foreign investors is that the U.S. Federal Reserve is still maintaining its stance on low interest rates, probably until 2014. Consequently, investors will look to park their money in emerging markets via bonds that offer higher interest rates. For example, foreign investors hold up to 43 percent of peso-denominated fixed rate bonds compared to 30 percent in 2010. Mexico’s central bank has kept its interest rate around 4.25 percent, with no signs of lowering the rate in the near future.

Mexico’s stock market, the 2nd largest in Latin America with a total market capitalization of approximately $450 billion, signed a letter of intent to join the Integrated Latin American Market (MILA) alongside Colombia, Peru and Chile—all stock markets experiencing unprecedented market gains and volume. The intention shows that the Latin American region is thinking outward and Mexico itself is not overly relying on the U.S.

But it would be naïve for Mexico—or anyone else—to think that it could de-couple its economy from the U.S. For instance, Mexico attributes 80 percent of its exports to the U.S. When the U.S. was battling the recession in 2009, Mexico felt the pain, nursing a wounded economy that was contracting, resulting in a 2009 GDP of -6.61 percent. When Americans do not consume, Mexican exports suffer, causing a ripple effect through manufacturing, remittances, and the tourism industry. Therefore, the common adage “when the U.S. sneezes, Mexico catches a cold” remains true. However, it does appear that Mexico recovered more quickly compared to its own economic calamity in 1994 – the Tequila crisis. This time Mexico recovered faster because it had an emerging middle class surfacing prior to 2009 that was not overleveraged, and Mexican enterprises are beginning to look abroad to export their goods.

Mexico once again has an opportunity to take full advantage of its proximity to the U.S.—still the world’s largest import market. Mexico is a key member of NAFTA, and therefore it would behoove Mexico to partner with the U.S. in streamlining border crossing operations pertaining to the movement of goods and services. Another benefit of this would be more jobs in Mexico, attacking the root cause of illegal immigration to the U.S. Immigration is a two way street, and with the U.S. economy still slumping, more Mexicans are returning to their homeland; nevertheless, Mexican leaders must bear the burden of creating an atmosphere of job growth, economic vitality, stability and security.

China’s ascendancy, in the long run, did more damage to Mexico’s international economic prospects than the American Great Recession. Chinese wages just 10 years ago were 300 percent cheaper than Mexican labor wages, a huge advantage in favor of Chinese manufacturing. When China was fully immersed into the WTO in 2001, Mexican leaders expected the worst was yet to come. U.S. companies relocated their Mexican operations to China, destroying Mexican jobs; other plants struggled to maintain their presence in Mexican lands. Mexico lost an enormous amount of U.S. market share to China.

Fast forward to 2011, and a new phenomenon is transcending Mexico’s manufacturing industry – Chinese wage increases. In 2011 alone, Chinese wages have risen an alarming 22 percent.

With increased prosperity, a higher per capita income arises and a higher standard of living is expected (and higher wages virtually demanded). This is good and bad for China. China needs to begin shifting its economic model from being export-based to ultimately domestic consumer-based, and this change will force that transition. However, China is years–perhaps decades–from transitioning its economy, but it now has to compete with countries such as Mexico.

Energy prices are also inexorably rising, paving the road for higher transportation costs and inflated freight expenses. U.S. manufacturers and export companies now see Mexico as a viable option. Companies are now strategizing to open shop in Mexico with aims to export to the U.S. because it can cut transportation costs that hinder manufacturing in China.

The reversion back to Mexico has already been ignited. The Japanese car manufacturer, Mazda, announced in 2011 that it would invest in a car-assembly plant in Mexico, costing $500 million with a capacity of 100,000 units per year. In the last few years, aerospace companies such as Goodrich and Bombardier have already identified the cost advantage of operating in Mexico by opening sizeable plants. Mid-sized aerospace companies have followed their bigger peers into setting their operations in Mexico, such as Oklahoma-based company Southwest United, a metal processor company, and Quebec-based Heroux Devtek, manufacturer of aerospace and industrial products. Mexico is creating a niche in industries such as aerospace that will only lift Mexico’s presence internationally.

Mexico has yet another advantage that can be perceived as more valuable than labor wages: labor skills. Mexico has what many companies are searching when it comes to skill sets and systems: low volume, high precision, automated manufacturing, and a certain acumen when dealing with engineered products. Improvements in technology and innovation are two ingredients that Mexico can deliver. The auto industry is at the forefront of maximizing this opportunity, using affordable labor with high skill sets, reinforced by the development of new plants being established or expanded by Volkswagen, Toyota, and Ford.

Domestically, under the presidency of Felipe Calderon Mexico has made drastic changes that point to an optimistic future. In 2011 Mexico has invested $50 billion in infrastructure, both private and public. Since 2005, Mexico has built more than 100 universities, 51 new campuses for already established universities, and 1,000 new high schools. Education is back as a much-needed priority, in order to shift from developing to developed nation.

Mexico boasts the 13th largest economy in the world without much fanfare. And it now has a special moment that it cannot let go to waste; as an energized economy it is raising hopes of stabilizing a robust middle class. The answer is not dependent on the U.S. alone, although Mexico cannot afford to antagonize the U.S. either. China’s rise is now a blessing in disguise for Mexico. Western companies are seeing Chinese manufacturing as a slight disadvantage when conducting their cost benefit analysis, opting to implement their manufacturing plants in Mexico, with similar wages, lower transportation costs and more skilled labor force. Indeed, it is a great opportunity for Mexico.

The world is changing. New powers are emerging, and Mexico can profit handsomely because it does possess the much-coveted label of an emerging market. Mexico can be in the headlines for the right reasons. Security needs to be stabilized, corruption needs to end, and the much-used victim card needs to be discarded forever. It is a daunting task at this moment, but nevertheless achievable. In essence, it is now or never for Mexico.

This article was originally published in the Diplomatic Courier's March/April edition.

Tagged under Mexico    Foreign Direct Investment    drugs    cartels    peso   
Last modified on Saturday, 14 April 2012 05:00

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