1. Mexico’s Economic Outlook
Animesh Ghoshal
DePaul University
Presented at US-Mexico Chamber of Commerce
April 28, 2015

2. Mexico’s Economic Outlook
Mexico in 1982
Integration of US and Mexican Economies
Concerns about China
Recent reforms
Prospects

3. 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

4. Economic Situation in Mexico, 1982 and 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*
* Data for 2013

5. 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)

6. Integration of US and Mexican Economies: GDP Growth Rates

7. 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
Consumption
-0.26
0.76
US Imports/Mexican Exports
-0.04
0.92

8. US Trade with Mexico

9. 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

10. US Imports from Canada, China, Mexico
China surpassed Mexico in 2003 and Canada in 2009, but “quality” of trade is different

11. “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

12. US “Vertical Integration” with Major Trading Partners, 2012
Exports
($b)
Imports
Total Trade
Percentage of US Content in Imports
Canada
292
324
616
25%
China
110
425
535 4%
Mexico
216
277
493
40%
Japan 70
146 2%
EU-27
265
380
645

13. 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

14. Structural reforms since 2013
Reforms enacted in last two years should have significant impact on growth:
Energy
Telecommunications
Finance
Competition
Education
Budgetary

15. 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 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

16. 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

17. 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

18. Other reforms Competition Education Budgetary
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
Mexican govt. sees these reforms boosting potential growth to 4-5% per year.

19. 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
At least 44 free trade agreements have been adopted.

20. Comparison with other major countries in Latin America (most recent data)
GDP growth
Inflation
Budget balance (% of GDP)
Interest rate on 10-year govt. bonds
Mexico
2.6
3.1
-3.4
5.66
Argentina
0.4
30.0
-3.1 na
Brazil
-0.2
8.1
-5.3
12.51
Chile
1.8
4.2
-2.0
4.54
Colombia
3.5
4.6
-2.1
6.68
Venezuela
-2.3
68.5
-15.9
11.03

21. 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!