Mexico’s Economic Outlook Animesh Ghoshal DePaul University Presented at US-Mexico Chamber of...
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Transcript of Mexico’s Economic Outlook Animesh Ghoshal DePaul University Presented at US-Mexico Chamber of...
Mexico’s Economic OutlookAnimesh GhoshalDePaul UniversityPresented at US-Mexico Chamber of CommerceApril 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
19901991
19921993
19941995
19961997
19981999
20002001
20022003
20042005
20062007
20082009
20102011
20122013
2014
-8
-6
-4
-2
0
2
4
6
8
GDP growth MexicoGDP 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
US Trade with Mexico
19851986
19871988
19891990
19911992
19931994
19951996
19971998
19992000
20012002
20032004
20052006
20072008
20092010
20112012
20132014
0
50000
100000
150000
200000
250000
300000
350000
US importsUS exports
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 $6.36And labor cost not the only cost
US Imports from Canada, China, Mexico
19851986
19871988
19891990
19911992
19931994
19951996
19971998
19992000
20012002
20032004
20052006
20072008
20092010
20112012
20132014
0
50000
100000
150000
200000
250000
300000
350000
400000
450000
500000
CanadaChinaMexico
“Labor Arbitrage” and Manufacturing CostsManufacturing Outsourcing Cost Index(Percentage of US Cost)
2005 2010 2015 (forecast)
Mexico 89 83 86
China 79 90 98
India 78 82 83
US “Vertical Integration” with Major Trading Partners, 2012
Exports($b)
Imports($b)
Total Trade($b)
Percentage of US Content in Imports
Canada 292 324 616 25%China 110 425 535 4%Mexico 216 277 493 40%Japan 70 146 216 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 Budget balance (% of GDP)
Interest rate on 10-year govt. bonds
Mexico 2.6 3.1 -3.4 5.66Argentina 0.4 30.0 -3.1 naBrazil -0.2 8.1 -5.3 12.51Chile 1.8 4.2 -2.0 4.54Colombia 3.5 4.6 -2.1 6.68Venezuela -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!