Mexico: numero uno in LatAm?

By: Adam Thomson
July 10, 2012

Forget the Bric countries or even just Brazil, the sweetheart of international investors over the past few years: it’s all about Mexico now.

That is the overriding conclusion of a report on Mexican banks, which was published Tuesday. The Nomura Equity Research report states that Mexico will likely overtake Brazil as Latin America’s biggest economy within the next decade.

It is a bold claim to make – particularly in the light of some concerns over the return of the opposition Institutional Revolutionary Party (PRI) to power following the July 1 presidential election, and of the country’s raging drugs war. But Nomura is probably right to be so bullish.

For a start, and as the report says, Mexico could well make significant advances in the coming months on the so-called structural reforms: labour reform to make hiring workers less onerous; an energy reform to increase private investment in the country’s potentially huge oil and gas sector; and a fiscal reform to reduce the government’s dependence on oil revenue while swelling the public coffers to pay for infrastructure and greater security.

The PRI, in the form of Enrique Peña Nieto, who won this month’s election, is fully behind the reforms for the first time in years. So is the centre-right National Action Party, which has held office for the past six years. That makes approval for the reforms likely for the first time since Mexico embraced a more democratic system towards the end of the 1990s.

All of that, added to the country’s strong public finances and the fact that Mexico is becoming more attractive as a manufacturing centre partly thanks to faster wage inflation in China, could raise Mexico’s potential gross domestic product, the rate at which a country can grow without affecting inflation, to about 4.5 per cent from 3 per cent at present.

Now consider Brazil, which as the FT highlighted in an analysis on Tuesday, is growing at a likely and lacklustre 2 per cent this year compared with 7.5 per cent two years ago. Much of the country’s industry has become globally uncompetitive – as the recent trade spat with Mexico over vehicles illustrated only too tellingly.

Nomura cites two more reasons to be optimistic about Mexico: its demographic bonus; and the huge potential of its banking sector. The first needs little explanation other than to recognise that Mexico has a young and growing population, and that it is now entering a demographic sweet spot that is expected to last for at least a couple of decades.

The second point underlines at the same time the underachievement of Mexico during the last decade or so but also the immense potential it has for expansion. In a series of graphs, for example, Nomura shows how Mexico has some of the lowest private-debt-to-GDP ratios in the region – roughly 20 per cent compared with 50 per cent for Brazil and 80 per cent in the case of Chile.

Nomura sees the conditions for a radical change, with the banking sector reaching 35 per cent of GDP by 2020, which implies a potential annual growth rate of between 15-17 per cent.

All this depends on several things. One is continued growth of the US economy. With almost 80 per cent of Mexico’s exports going to that market, and with exports representing close to 30 per cent of GDP, nobody doubts the central role the US economy plays in any growth forecasts for Mexico.

Another is the country’s drugs war, which, surprisingly, has not had as big an effect on foreign direct investment as you would think. Even so, the crime spike does represent a drag on economic growth. It also remains a source of concern for investors even though most of them conclude that, for now, it is worth going to Mexico.

But there is no doubt about Mexico’s potential over the coming decade. Nomura was right to point it out.

Editor’s Note: Learn more about PICOR’s activities and representation in Sonora, Mexico.

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