Transcript Mexico`s Economic Outlook

Mexico’s Economic
Outlook
Animesh Ghoshal
DePaul University
Presented at US-Mexico Chamber of Commerce
April 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
8
6
4
2
GDP growth Mexico
-2
-4
-6
-8
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
0
GDP 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
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
US Trade with Mexico
350000
300000
250000
200000
US imports
150000
US exports
100000
50000
0
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 $6.36
And labor cost not the only cost
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
US Imports from Canada,
China, Mexico
500000
450000
400000
350000
300000
250000
Canada
China
200000
Mexico
150000
100000
50000
0
“Labor Arbitrage” and
Manufacturing Costs
Manufacturing Outsourcing Cost Index
(Percentage of US Cost)
2005
2010
2015 (forecast)
Mexico
89
83
86
China
79
90
98
India
78
82
83
US “Vertical Integration” with
Major Trading Partners, 2012
Exports
($b)
Imports
($b)
Total
Trade
($b)
Canada
292
324
616
Percentage
of US
Content in
Imports
25%
China
Mexico
Japan
110
216
70
425
277
146
535
493
216
4%
40%
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
3.1
Budget
balance
(% of
GDP)
-3.4
Interest
rate on 10year govt.
bonds
5.66
Mexico
2.6
Argentina
Brazil
Chile
Colombia
0.4
-0.2
1.8
3.5
30.0
8.1
4.2
4.6
-3.1
-5.3
-2.0
-2.1
na
12.51
4.54
6.68
Venezuela -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!