Mexico: Year in Review 2012
Relative economic and political stability over the past two decades has given Mexico a strong platform to continue its long-term development. Indeed, Latin America’s second-largest economy continues to expand at a steady pace, despite well-publicised and widespread drug-related violence, most of it between warring factions of various cartels. The Banco de México (Banxico), the central bank expects economic growth for 2012 to come in at between 3.5% and 4%, while predictions for 2013 lie between 3% and 4%, with Banxico targeting 3.5%.
Recently inaugurated President Enrique Peña Nieto campaigned on the back of suggested reforms that would bring economic growth to 6% by the end of his term. To do so, Peña Nieto will need to get the most out of two of Mexico’s chief economic contributors, which are seemingly moving in opposite directions. Indeed, while industrial manufacturing continues to grow in size and sophistication, the country’s oil sector stagnates.
Shortly after taking office, Peña Nieto delivered the first glance at his administration’s potential agenda, labelled the “Pacto por Mexico”, which seeks to apply reforms that will improve education, government finance and promote deeper competition in the telecommunications sector.
However, the most contentious reform could open up Mexico’s oil and gas sector to further private investment, as state-owned Petroleos Mexicanos (PEMEX) continues to struggle to ramp up production. Mexico, a member of the Organisation of the Petroleum Exporting Countries (OPEC), has seen its oil production drop from a high of 3.4m barrels per day (bpd) in 2004 to 2.55m bpd in 2011.
Production levels for 2012 are forecast to remain stable and are not likely to vary significantly from the previous year. However, the reform plan falls short of calling for private investment in upstream activities where it is needed most, focusing instead on promoting competition within the downstream segment, including petrochemicals, transportation and refineries.
However, any drastic overhaul to the sector will likely be difficult, as legal barriers prevent PEMEX from entering into joint ventures with the private sector. Overcoming this hurdle would not only allow fresh investment in a faltering sector, but also reduce exploratory risk for PEMEX and bring in private sector expertise. Mexico’s government relies on its oil sector for roughly one-third of its income, leaving its public finances vulnerable to any significant decreases in the price of oil.
Peña Nieto has proposed a balanced budget for 2013, which forecasts oil revenues from a slight increase in production to 2.6m bpd at an average price of $85 per barrel. This would also help the country maintain the top income tax rate for individuals and corporations at 30%, thus cancelling a scheduled 1% reduction. According to Luis Videgaray, the minister of finance, “Stability in and of itself is not the objective, but in order to have economic growth and job creation, we need stability, and stability is created through fiscal responsibility”.
While the oil sector may need reform, Mexico’s manufacturing sector continues to expand, following a difficult period brought on by the global financial crisis in 2009. The success of the manufacturing sector is largely due to the creation of the North American Free Trade Agreement (NAFTA), which was introduced in 1994. Since NAFTA’s inception, Mexico’s economy has greatly benefitted from its dynamic manufacturing sector.
With labour costs rising sharply in China in recent years, Mexico’s industrial manufacturing sector is well positioned to continue its recent growth trajectory. According to the National Statistics Institute (Instituto Nacional de Estadística y Geografía, INEGI), the sector expanded 5.9%, 5.1% and 4.1%, respectively, in the first three quarters of 2012. Its role in the wider economy cannot be mistaken – industrial manufacturing accounted for 17.5% of GDP in 2011.
While boasting more than 12 free trade agreements, which provide privileged access to more than 44 nations, the vast majority of exports have traditionally been sent north to the US. However, over the past decade the country has been diversifying its external trading partners, with a greater share of exports being sent to Latin America and Europe. Even so, Mexico’s economy is still very much intertwined with that of the US. According to INEGI, 78.5% of Mexico’s exports headed north in 2011, down less than 10% from the 88.1% recorded in 2002.
The IMF has estimated growth in Mexico’s northern neighbour to remain somewhat constrained in 2013, forecasting a 2.1% expansion. However, the US government’s fiscal difficulties could prove problematic for its delicate economic recovery, but also for global markets, and Mexico in particular. Presuming such a crisis is averted, Mexico’s economic expansion will continue in 2013, albeit limited by its ongoing war on drugs and stagnant oil production. If the new administration can make progress on one or both fronts, Mexico’s longer-term economic prospects will indeed brighten further.