Article - Strong Economy Despite Politics 01-1

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Ameri cas Market Intell igence

Pestalozzi 923Colonia del Valle, Mexico DF 03100+52 (55) 5335-1712www.americasmi.com

August 2012

Mexicos economy still looks strongdespite its politics

Mexico has been plagued with a tarnished image in recent years as the foreign press haschronicled the countrys ills, from the ongoing drug war to corruption within governmentinstitutions. The countrys recent presidential election on July 1sthas added one more elementof controversy to the list as the press has reported fraudulent vote-buying tactics on the part ofthe victorious PRI party.1

Despite being officially declared the winner, Enrique Pea Nietos election has been tarnished

by accusations of fraud, placing doubt on the incoming presidents motives and integrity; theunfolding scandal has also revived old fears about the partys long track record of corruptionand political manipulation, while complicating the president-elects efforts to focus on thecountrys pressing challenges. As things stand, Mr. Pea Nieto will not enjoy the traditionalhoneymoon following victory at the polls in the months leading up to his swearing in as thenew head of state on December 1st. Instead, the transition of power looks set to occur amidst astorm of controversy, legal challenges, and growing fears among voters about the implicationsof the return of the PRI to power for transparency and democracy.

In spite of these unflattering headlines, the countrys economic fundamentals remain strongand are unlikely to be undermined by the political shenanigans of the presidential election.This is in large part due to the success of last two PAN administrations in enacting soundmacroeconomic policies and strengthening the domestic economy. 2 In times of instability,volatile markets, and general malaise, it is welcome news to see the country still pushing forstability, even in light of civil protests at the unfolding electoral scandal.

Sound economic management has led to a strong rebound sincethe global crisisThe outgoing administration will hand over the reins to the PRI just as the economy isrebounding following the 2009-2010 crisis. This rebound is primarily due to the soundeconomic policies of the last 14 years. Mexicos real GDP has averaged a steady growth of

2.37% between 2003 and 2011, reaching US$ 1.13 trillion in 2011 (see graph 1). Among thepolicies that contributed to this favorable track record, four stand out and are likely to remain acenterpiece of the incoming administrations economic strategy.

1The Partido Revolucionario Institucional (Institutional Revolutionary Party or PRI) came in first with 38% of the

vote; a partial recount following challenges by the PRDs candidate (who came in second) actually showed aslight increase of the PRIs tally, at approximately 39% of the vote.2The Partido de Accin Nacional (National Action Party or PAN) held the presidency from 2000-2006 under

Vicente Fox and from 2006-2012 under Felipe Caldern.


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STRICTLY PRIVATE ANDCONFIDENTIAL 2

A primary contributing factor to Mexicos economic stability was the introduction and growth ofconsumer credit starting in 2001. In a country where cash has always been king, Mexicosconsumer credit expansion was never a foregone conclusion, especially since it began withthe introduction of only nominally low-interest credit cardswhose 20% APR wereconsidered cheap credit at the time. Since then, consumption growth and credit growth trendshave matched each other; and in 2009 and 2010 consumption growth even outpaced creditgrowth (see graph 2).

Private consumption in Mexico has been growing at an average rate of 5% per year since2001, reaching US$ 739 bi in 2011, the equivalent of US$ 6,490 per capita. Putting this intoperspective, India has a per capita consumption of US$ 879, China of US$ 1,810, and Brazil ofUS$ 7,740.


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Simultaneously, Mexico ran a (nearly) balanced budget from 2004-2008, which has alsoplayed a significant role in providing stability to the economy. The government incurred ahigher budget deficit only when the global economic crisis came about, and even at the heightof the crisis in 2009, the deficit was a mere 2.4% of GDP. As a result, Mexicos debt-to-GDPratio remains in a reasonable range at 46%, compared to 71% in India, and 67% in Brazil.

Meanwhile, Mexico maintained inflation under control; the inflation rate was 3.8% in 2011,lower than in any of the BRIC countries.

Industrial production has been one of the key engines of the Mexican economy and will remainan economic pillar in the foreseeable future; at its heart is the maquila sector, focused onexporting goods to foreign markets, primarily to the United States. When global consumerdemand came to a standstill in 2008, Mexican industrial production ground to a halt, and evenshrank by -7.6% in 2009, but the maquila sector weathered the crisis better than other regions.Though the drop in production was considerable, it was moderate compared to the 11.4%decrease in production in the United States and the 13.6% decrease in Europe during thesame period. Additionally, industrial production rebounded soon afterwards, posting growth of6% in 2010 and 4% in 2011.

Finally, the 2009 recession provided an unexpected opportunity for the economy to diversify itsexport markets. The drop in demand from its primary market pushed Mexican producers tolook beyond the United States for new markets in which to sell their products. While the UnitedStates remains Mexicos leading trading partner, Mexican export manufacturers have beenable to diversify their export base looking to new markets such as China, India, Colombia,Brazil as well as other countries of Latin America. As a result, the share of Mexican exportsgoing to the United States decreased from 90% in 2001 to 79% in 2011.

Looking forward: prospects for sustaining the rebound in growth

Despite the inauspicious aftermath of the election, there is little doubt that Mr. Pea Nieto willassume the presidency on December 1st, by which time most of the current upheaval will likelyhave died down. By then, the new president will be firmly focused on his policy agenda.

If Mr. Pea Nietos time as Governor of Mexico State is any indication of his actions asPresident, it is likely that the country will maintain a conservative posture with regard to publicfinances and fiscal management. Having run a balanced budget in his home state while inoffice between 2011-2006, the President-elect will likely adopt a similar posture of fiscalprudence. Additionally, it is likely that inflation will remain moderate, between 3%-5% and withoil prices remaining high the government will have a strong platform from which to driveeconomic policy.

That said, the prospects for economic and structural reform are less clear. The PRI will not

have an absolute majority in either the Senate or House of Representatives when the newCongress begins on September 1st. Mr. Pea Nieto will have to negotiate with other parties inorder to get legislation approved. Between them, the PRI and the PAN together account forover 70% of the votes in Congress, 3 which allows for the possibility of a negotiatedconvergence in legislative policies, keeping Mexico on its stable path forward. While progress

3In the Senate: PRI + PVEM, 32% and PAN, 39%; In the House of Representatives: PRI + PVEM, 52% and PAN

28%.


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on issues of transparency and democracy remain uncertain at best, the fact that Mexicos hardearned economic stability will not be compromised is welcome news.

Guillaume Corpart is the Managing Director of Americas MarketIntelligence and a veteran of Latin American competitive intelligence andstrategy consulting.

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