May 16, 2013 3:37 pm

Mexico banks on stronger economic growth later this year

Over the past few years, officials at Mexico’s national statistics agency have become used to publishing the glowing quarterly economic growth figures that have plotted the country’s recovery since the financial crisis.

But on Friday, the statisticians will probably show the world a very different set of numbers – one that, if economists have their estimates right, will confirm the worst year-on-year quarterly result since the 2009 recession. Some even suggest that it might be negative.

Could it be that Mexico’s rebound, which has helped Latin America’s second-largest economy emerge from Brazil’s shadow into full view of international investors, is coming to an end?

There is no doubt that the once solid growth of about 4 per cent that has pushed the country’s gross domestic product to its highest level and stock market to a new record on January 28, has slowed.

That is in part, argues Gabriel Casillas, chief economist at Mexican bank Banorte, because of the poor performance of US industry, which sources billions of dollars in manufactured goods from Mexico but where economic growth disappointed in the first three months of 2013.

For all its efforts to diversify in recent years, Mexico remains highly dependent on its northern neighbour. The US still accounts for almost 80 per cent of all Mexican exports as part of an overall bilateral trade worth US$1m every single minute.

And while the mainly manufactured goods that Mexico exports only account for about 19 per cent of the country’s GDP, their health affects almost all other areas of the economy. “They are the spark plug of Mexico’s economy,” says Mr Casillas. “If they’re not firing, the rest of the engine doesn’t work.”

But economists are already seeing a pick-up north of the border, which they say will start to affect Mexican growth towards the second half of the year. Already, argues Marco Oviedo of Barclays in Mexico City, there are signs that things are starting to recover: car production, a bellwether of Mexico’s manufacturing export sector, increased 14.7 per cent in April compared with the previous month.

As if to illustrate a longer-term optimism, Audi this month started work on its $1.3bm Mexico plant, which will produce 150,000 cars a year. Volkswagen, which owns Audi, already uses Mexico to produce all of its Beetles for the global market.

Roughly 57% of Mexico’s fixed-rate, peso-denominated domestic bonds are now in foreign hands compared with less than 30 per cent two years ago

Besides, economists stress that the other two principal factors dragging down growth so far this year are transitory. Benito Berber of Nomura Holdings Inc in New York says that one of them is the statistical effect of comparing this quarter, in which there were Easter holidays, and the same quarter last year, in which there were not. “That is a huge thing,” he says. “It really distorts the annual comparison.”

Another was the change of government in December, which has the temporary effect of stalling government spending while the new ministers and their teams get used to their new jobs. As Mr Casillas of Banorte puts it, “governments have to learn how to spend the money”, he says.


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While those temporary factors pass, international investors continue to look favourably on Mexico and are particularly upbeat about the prospects of sweeping structural economic reforms, which President Enrique Peña Nieto has vowed to push through congress.

Largely as a result, international capital flows into the country have outnumbered those to Brazil over the past year.

Roughly 57 per cent of the country’s fixed-rate, peso-denominated domestic bonds are now in foreign hands compared with less than 30 per cent two years ago. Fitch, the rating agency, this month upgraded Mexico’s foreign-currency debt to BBB+.

The influx has even become a concern for the country’s central bank, which has already spoken out about the potential dangers of a reversal if and when the international outlook changes.

On March 8, the bank cut interest rates to a record low of 4 per cent and many investors believe that it will do so again by July – in large part, so private-sector economists say, to take the pressure off the strengthening peso. The local currency has gained about 5.7 per cent against the dollar this year, the biggest appreciation out of the dollar’s most-traded cross currencies.

For now, and leaving aside the bad figure expected on Friday, analysts are not concerned about Mexico’s growth prospects and consensus forecasts suggest that the economy will expand 3.4 per cent this year and 4 per cent in 2014. As Mr Casillas says, “things are going to pick up”.

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