Latin Finance - July/August 2012 - 12

Mexico

an economist at Credit Suisse. “There is a the largest shale reserves in the world. Mexico has a strong manufacturing focus on negative events, and many have base which uses natural gas as a raw heard talk of reforms many times before, material for production, adding another only to be disappointed by the result.” competitive advantage over China. Investment is already returning “This will drive the manufacturing in to Mexico. Some $10 billion has been ploughed into the auto sector over the last many industries, not only commodities, five years. Nissan, Mazda and Honda have but everything, the whole manufacturing base will be more competitive just on the all announced plans to build new plants in Mexico, and further new investment in natural gas advantage,” says Ramon Leal, industries including aerospace and electronics are expected soon. The automotive sector represents 28% of total manufacturing exports or 7% of GDP. Mexico’s exports have grown more diverse, however, and it has attracted significant foreign direct investment. It is the world’s first exporter of refrigerators and the second largest supplier of electronic products to the US market, computer equipment and parts, and telecommunications. Mexico had struggled as Chinese-made products replaced its goods in the US, which buys about 80% of Mexico’s exports. But a Chinese slowdown could mean less demand for Brazilian commodities, and so less competition for Mexican manufacturing. The faster rate of wage increases in China than in Mexico suggests that the cost advantage China once enjoyed is fast dissipating, according to Peña Nieto: the hand of victory Nomura. Chinese labor rates were 33% of Mexico’s in 1996, chief financial officer of Alfa, whose Alpek yet now they are close to or even higher unit is among those companies standing than those in Mexico, the bank notes. to benefit. China-US transportation costs have The exchange rate also paints a also gone through the roof, and Mexico could further extend the advantage if the favorable picture for exporters. A weaker dollar relative to the world’s major government is successful in lowering the currencies, means more competitive costs of production. exports in the US which will help Mexican Another point in Mexico’s favor suppliers. is the shale gas revolution in North The global downturn could also boost America that has come on the back of Mexico’s tourist sector, which stands improvements in hydraulic fracturing, to benefit from its proximity to the US. a process also known as “fracking.” Faced with tigher budgets American Mexico and the US are sitting on one of

holidaymakers will be reluctant to spend more on long-distance vacations and could instead choose destinations, such as Mexico, closer to home. Foreign direct investment (FDI) flowing into Mexico should be $22 billion to $23 billion this year, according to HSBC, and the country is able to make the most of its flows. Mexico gets $14 of exports for every $1 of FDI, says Sergio Martin, an economist at HSBC. This compares to $9 in China and $4 in Brazil. These advantages are striking when considering the lack of obvious reforms in Mexico during the 12 years of National Action Party (PAN) presidencies. To capitalize on these fundamental shifts, experts say Mexico must make large improvements in the energy, fiscal, labor and education sectors. Much of the hype in the first half of 2012 over change was down to the fact that Peña Nieto’s calls for a new direction were the loudest of the three major candidates. Followers of Mexican history may find it odd that the PRI – which for seven decades restrained Mexico with its tough grip on democracy, the economy and many facets of life – is the party now poised to spearhead much-needed changes. Supporters claim that Peña Nieto represents a changed party, and point to a strong track record as governor of the state of Mexico. Skeptics fear a return to the old ways. “There is a new wave of PRIstas, younger and more modern, who are surrounding Peña Nieto,” Cervera says. “The PRI gets it and wants to stay in power for more than six years. The only way to do this is to deliver. This is Mexico’s golden opportunity.” The list of reforms is the same and almost all of the politicians are agreed on them, Cervera says. He expects the PRI

Reforms finally?

12 LatinFinance

July/August 2012

Latin Finance - July/August 2012

Table of Contents for the Digital Edition of Latin Finance - July/August 2012