Mexico manufacturing its way to investors’ hearts

February 25, 2013

By Stephen Eisenhammer

Mexico appears to be the new Latin American darling for investors. With Brazil stalling, Latin America’s second largest economy is back in, after nearly two decades out in the cold.

Rising transport costs and higher wages in China are tipping manufacturing competitiveness  back in favour of Mexico for the first time since the Asian giant joined the World Trade Organisation in 2001.

Mexico’s new president, Enrique Pena Nieto of the PRI party which governed continuously for 71 years until 2000, appears serious about wringing necessary changes to the state-run oil company – Pemex, the education system, and the monopolised telecoms sector.

JP Morgan said the improvements could call for an outlook upgrade from the ratings agencies in the near future.

“The approval of the labor reform last year was quickly followed by important first steps to overhaul the educational system, signalling the administration’s commitment to the reform agenda,” the bank said in a note.

A ratings upgrade from the current triple-B investment grade was probably further away, but certainly not out of the question, the note said.

“The prospects for reform progress in Mexico have not been better in over a decade and, if the authorities deliver meaningful fiscal and energy reforms, an upward revision seems very likely.”

The resurrection of Mexico’s manufacturing sector was singled out as a key factor by JP Morgan.

“Part of Mexico’s healthy recovery since mid 2009 likely reflects the improved competitiveness of Mexico’s manufacturing sector – which has outperformed its U.S. counterparts by nearly 6 percentage points since the mid-2009 trough.”

However, a number of severe challenges lie ahead, particularly on the fiscal side. The government takes an embarrassingly small 10 percent of GDP in non-oil tax returns and remains reliant on Pemex, a company starved of investment for decades whose production has been falling since 2004.

It will take some skillful manoeuvering from Pena Nieto to change this, especially from within a political party historically so interlinked with the system he is trying to change.

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