By Nathaniel Parish Flannery
Within Mexico many citizens are frustrated with their country’s economic performance and are questioning their government’s ability to navigate its way through a year of global economic turbulence. A precipitous drop in petroleum prices has sucked the air out of Mexico’s highly promoted push to open its oil sector to foreign investors. At the same time economic trouble in China has contributed to a drop in commodity prices. But, while Brazil and Venezuela are both dipping into recession, Mexico’s economy continues to expand. Although companies such as ICA and Grupo Mexico have been hurt by weakness in the construction and mining sectors, other economic sectors continue to shine. Ford sold 1.2 million cars in Mexico in 2014 and continues to expand sales in 2015. Coca-Cola FEMSA reports that its sales in Mexico and Central America increased by 6.7% in the second quarter of 2015. GE, GM, Audi, IBM and a long list of other manufacturing companies continue to invest heavily to increase output in Mexico. Although manufacturing remains a bright spot, construction and mining are two causes for concern. During the second quarter of 2015 ICA’s construction business accounted for 73% of the company’s revenues and only 8% of the company’s profits. Grupo Mexico saw its mining division’s net profits drop by $47 million in the first quarter of 2015 due to falling commodities prices.
To get a sense of Mexico’s current economic health I reached out to three expert analysts to ask for their opinions. Alberto Bernal, Head of Research at Bulltick Capital: I would not argue that the Mexican economy is in a situation that’s negative. I would not compare it to Brazil. Perhaps Colombia will grow faster this year, but in terms of competitiveness and private sector growth [Mexico] is the story to show.
Mexico’s growth could be much stronger—it should be growing at 5 percent but it’s not.
You see weakness in oil exploration – but you don’t see weakness in consumer demand. Car sales in Mexico are growing. As of August of this year domestic car sales are up 16 percent. That’s impressive. This is completely different from Brazil where consumption is collapsing.
One of the main challenges is to be able to educate better, especially at the lower level. At the higher level, Mexico produces a fair number of engineers. Mexico produces more engineers than Germany. At the higher level things look better. The problem is at the lower level. You need to start with initial education. Most cognitive capacity and intelligence are shaped by the first few years of life. [In Mexico] your competition is Vietnam. Vietnam spends a huge amount of money on education. It doesn’t make a difference if you have the best universities. You need to fix primary education.
Mexico has been hit by a bad joke. You open the energy sector and oil prices collapse. If we had higher oil prices we’d see more interest to invest more. Just imagine if oil prices were at $100 right now. But at fifty the business doesn’t look that enticing right now.
But still, in many ways Mexico is the envy of Latin America. In the case of Mexico, the China slowdown doesn’t affect it much. China is not a strong buyer of Mexican output. Chile, Brazil, Argentina, Colombia, Venezuela, those are countries being affected by the China slowdown. From the standpoint of Mexico—it would be disingenuous to say Mexico is like Argentina or Colombia. It’s a totally different story. Mexico is a very competitive country. What is one of the most resilient economies in the emerging world right now? My bet right now is Mexico.
Non-petroleum exports are at $372 billion. Mexico has done something right. It’s the envy of Latin America. I’m not saying we should be cheerleaders but it’s a mistake in my view to say that Mexico is doomed.
Ricardo Aceves, Latin America analyst and economist at FocusEconomics:
In general terms the Mexican economy is growing at below its potential. Below 3% is below its potential. It’s been this way since the start of the Peña Nieto administration. The economy has been underperforming. Growth isn’t taking off. Little by little it’s slowing because of external shocks such as the fall in commodity prices. Falling oil prices affect the government’s budget and [force] a reduction in spending. That’s the weak point.
Mexico is not immune from suffering from the effects of global economic turbulence. But, nevertheless it’s better prepared than other countries. Monetary and fiscal policy have been prudent.
But, within Latin America, Mexico is positioned relatively well. In spite of the fact that expectations have been falling, Mexico will grow at 2.5% this year. By contrast Brazil has entered into a deep recession.
Carlos Petersen, a Mexico analyst at the political risk consultancy Eurasia Group:
Under the current external shocks that emerging market economies are experiencing a tough situation and Mexico has been doing pretty well. Mexico is one of the only countries sustaining its growth. Brazil, Chile, and Colombia are slowing down and Mexico has been going against the tide. That’s a positive story. The automobile sector is doing very well. The retail sector is doing very well. Remittances from the U.S. are growing because of the exchange rate. Moving ahead the potential risks are there. If the U.S. economy continues to grow [slowly] and exports don’t pick up that will affect Mexico.
The construction sector keeps disappointing. Construction remains sluggish. Oil production and mining are also suffering.
From the policy perspective, the budget cuts are a sign of fiscal responsibility when revenues are declining. It’s prudent fiscal policy. In the long term Mexico will remain stable but in the short term growth will remain sluggish.