Opinion

The Great Debate

Mexico’s reversal of fortune

By Gary Regenstreif
January 17, 2014

In Latin America, this looks to be the year of Brazil — thanks to the impending World Cup and presidential elections. But with another lackluster year looming in emerging markets, fans of transformation, growth and investment potential should instead look to Mexico.

Brazil’s president, Dilma Rousseff, is expected to win a second term this year, and its soccer team stands a good shot at victory. But growth has slowed considerably. In the world’s seventh largest economy, reforms are stagnating and the country faces a possible ratings downgrade.

Mexico, by contrast, is in the throes of serious reforms. It will likely lead Latin America with at least 4 percent growth this year and an improving investment outlook. Standard & Poor’s recently boosted Mexico’s credit ratings because of energy reforms that the rating company trumpeted last month as a “watershed moment” for the country. It is becoming a story of inverted fortunes, as Michael Shifter and Cameron Combs of the Inter-American Dialogue recently wrote.

After years of stagnation and violence, a new reform government is positioning Mexico for significant growth. It should leave many emerging markets, including fellow Latin American economic power Brazil, in its wake. Jobs are increasing, inflation is lower, growth is higher and the returns on Mexican equities are multiples of what they have been in Brazil.

“Mexico may quickly swing from the region’s worst to best performer,” emerging markets economist David Rees from Capital Economics wrote in a research note to clients late last year.

Meanwhile Brazil, after soaring for a decade, has come back to earth. Its economy contracted in the third quarter and is expected to grow by little more than 2 percent for 2013. Brazil is struggling to stay competitive and contain inflation. Hundreds of thousands of demonstrators spilled into the streets in June to protest poor public service and the high cost of living. Growth is only expected to be 1.5-2.0 percent this year, while inflation could be up to  5.8 – 6.2 percent.

Brazil’s finances, too, have worsened since the economy slowed sharply two years ago. Economists now say Brazil needs deep reforms to slash current expenditures and lower future pension payments. Standard & Poor’s put Brazil’s rating on negative outlook in June. Moody’s is not far behind, lowering Brazil from positive to stable in October. We are now heading into an election year, when fiscal rigor is unlikely.

This needs some context. Most emerging economies suffered in the past two years, as growth slowed globally. The investment bank Nomura used a series of economic metrics to track Brazil’s relative performance against a peer group of other emerging market economies: Mexico, Turkey, Indonesia, South Africa, Colombia and Chile. Brazil had a much-better-than-average recovery after the 2008 financial crisis, with both growth and investments coming in above average. Since 2011, however, it has been performing poorly compared to the others.

Enter Enrique Peña Nieto, a telegenic Mexican state governor who won the presidency in 2012, bringing the Institutional Revolutionary Party (PRI) back to power for the first time since its 70-year reign ended with the 2000 elections. His ambition was to transform the country.

A skilled negotiator and dealmaker, Pena Nieto, 47, crossed party lines and enlisted the opposition in a “Pact for Mexico,” which puts Washington’s sharply partisan politics to shame. He has driven changes many thought were not possible.

His most significant reform revised Mexico’s constitution, opening the energy industry to private investment. Another key reform allows legislators and mayors to run for consecutive terms, which had been banned since the early 1920s. That will provide more accountability in a country with a history of authoritarian rule (by the PRI). The possibility of re-election should, in theory, be an incentive for better governance.

Peña Nieto also pushed through educational reform, making teaching more merit based, as well as introducing evaluations and performance tests. He is opening up the telecommunications industry to more competition, seeking to lower prices for consumers. His fiscal reform is designed to increase government revenue while redistributing the tax burden — raising rates on the wealthiest, taxing capital gains and dividends, homogenizing the value added tax rate and putting new levies on sugary beverages and junk food. He is also creating unemployment insurance and universal pension for people 65 years or older.

What is impressive is not just the sheer number of reforms but the skill he has demonstrated to get them through. The controversial energy and education reforms, for example, both needed a two-thirds super-majority in Congress to pass.

Meanwhile, the economic data is encouraging — if clearly not all the government’s doing. Mexico’s manufacturing sector is now competitive and its economy is not as reliant on commodities as other Latin American countries are. So the nation can weather the economic shocks of commodity price changes far easier. Its retail sales and manufacturing sectors are hitting highs not seen in almost a year. For almost 80 percent of Mexican exports, largely industrial, are directed to the U.S. market, which is recovering.

Standard & Poor’s raised its main credit rating for Mexico on December 20 by one notch, in the latest sign of growing confidence. The credit rating company had lagged behind the other two main agencies, which have both placed Mexico just one notch shy of an “A” rating. Chile is the only Latin American nation that has an “A.” Analysts and fund managers are saying Mexico could earn another upgrade by at least one of the agencies in the next few months.

Long term, Mexico has been positioning for stronger trade. Twenty years after the North American Free Trade Agreement (NAFTA) with the United States and Canada went into force, Mexico it is counting on at least two other major alliances to find new markets for its manufactured and other goods.

First, the ambitious Trans-Pacific Partnership would create a free-trade bloc of 12 countries, including NAFTA members, Chile, Japan and other Asian nations. This group makes up about 40 percent of the global economy.

Second, the Pacific Alliance, is a regional group that Mexico helped create in 2012 with Chile, Colombia and Peru. This aims to establish free trade and the free movement of people, as well as a common stock exchange.

In the short-term, however, domestic risks abound in how the government will implement these reforms. “Secondary” bills, for example, are needed to flesh out the details of the energy reform implementation. That will determine whether the investment conditions are attractive enough to lure foreign oil companies.

With one political party, the leftist PRD, now pulling out of the Pact for Mexico, Peña Nieto needs to keep the opposition on board to get this and other reforms through.

Passage of reform bills is not enough, however. The president will need to show the benefits to Mexicans. Those dividends haven’t turned up yet. Indeed, some measures could cause problems. For example, roughly 45 percent of the population is poor, so new VATs and levies on junk food and soda would further erode their purchasing power.

Another remaining challenge is to reduce violence between drug gangs and other criminals. While murders fell slightly last year, kidnapping and extortion increased.

Jorge Castaneda, former Mexican foreign minister and foe of the PRI, touched on these improvements in his recent essay, “Mexico’s Second Revolution.”

“Mexico, a stagnant and violence-plagued country in recent years,” Castaneda writes, “ finally began to overcome its malaise in 2013, thanks to an activist president and a coalition of political parties determined to move the country forward. Thus, President Enrique Peña Nieto’s task since taking office one year ago has been to ensure that the promise of major change in Mexico finally translates into sustained economic growth, improved living standards and faster convergence with the U.S. and Canada.”

The president would do well to remember how Brazilians, following a decade of rosy economic indicators, took to the streets last year to complain they weren’t seeing the benefits. As Pena Nieto told Foreign Affairs: “The government has come not to manage but to transform.”

Yet careful management will be necessary, so that visible benefits can buy his government public patience for the continued transformation.

 

PHOTO (TOP): Mexico’s President Enrique Pena Nieto addresses the audience during the Economist’s Mexico Summit 2013 in Mexico City, November 7, 2013. REUTERS/Tomas Bravo

PHOTO (INSERT 1): Brazil’s President Dilma Rousseff and Mexican President Enrique Pena Nieto pose before a meeting in Santiago, January 26, 2013. REUTERS/Mexico Presidency/Handout

PHOTO (INSERT2): Demonstrators hold up a banner reading, “Stop the looting, the oil is ours,” during a rally against the Mexican energy market reforms in downtown Mexico City, December 20, 2013. REUTERS/Henry Romero

Comments
13 comments so far | RSS Comments RSS

Make Mexico the 51st thru 60th states. Solves immigration problems….

Posted by tmc | Report as abusive
 

Don’t count Mexican chickens until they hatch. There’s a long and bumby road between passage and implementation of reforms.

Posted by Zaichik | Report as abusive
 

These are welcome signs for our neighbor. With strong countries and economies on both sides, the U.S. can only benefit. However, the drug issue (which the huge U.S. market facilitates) cannot be over stated as a deterrent to Mexican prosperity. The Michoacán debacle in which the federal government has failed to protect the people from a cartel and now wants to stop the people when they defend themselves projects a horrible image of business as usual. The federal government has an opportunity here to show how sincere they are, but they must attack the cartel first, not the vigilantes.

Posted by BuckeyeNick | Report as abusive
 

TMC, what makes you think that the US can “make” Mexico a US state? Historically Mexicans have to the US to work for higher wages than they could earn back home but if you think they desire Mexico to become just like the US and wouldn’t fight to the death to prevent it then you dont know anything about Mexico.

Posted by uzarate | Report as abusive
 

I am down in Mexico, my second winter. The inflation is triggered by the major food chains. Ley.s started it then soriana’s followed then by the others. They have managed to monopolize and are doubling, sometimes quadrupling prices. Especially on anything imported. Hyperinflation is earnestly out of control. Added by shipping companies compromising NAFTA trade reforms, by overpricing shipments as well as charging double the import tax.

Posted by 1TOPDOG | Report as abusive
 

I am down in Mexico, my second winter. The inflation is triggered by the major food chains. Ley.s started it then soriana’s followed then by the others. They have managed to monopolize and are doubling, sometimes quadrupling prices. Especially on anything imported. Hyperinflation is earnestly out of control. Added by shipping companies compromising NAFTA trade reforms, by overpricing shipments as well as charging double the import tax.

Posted by 1TOPDOG | Report as abusive
 

It seems most have given Pope Francis the clearly deserved benefit of any doubt from his words and actions to date.

Should we not do the same for Pena Nieto at this point? The man can’t succeed unless most support his policies and efforts over time, particularly so long as he is moving in the right direction with appropriate priorities.

Posted by OneOfTheSheep | Report as abusive
 

First of all Mexico will not hit 4% growth at least not with the opinions most of the economy experts .
Second , if it did Panama would still leave it in the dust . I live in Mexico and have for years , they talk a big game but no way of fully implementing their new found focus .
Although the new President talks up change , there will be very little . Still massive drug wars , bodies found routinely and massive infrastructure failures , things are looking grim in many areas .Really long road from 3rd world /emerging nation to first world countries .
Now with inflation nearing 4% and the taxes for products going up considerably , we feel it’s feeble comeback will be short lived ..

Posted by Dollar | Report as abusive
 

Your marijuana dollars at work.

Posted by 1TOPDOG | Report as abusive
 

Making it a sate is absurd and never going to happen. However, strongly enforcing illegal immigration will ultimately have a positive effect. Some people think that anybody behind strong efforts to stop illegals, are terrible, mean people. But in reality, it is the only way to actually change Mexico for the better. As long as the easy out exists (hopping over the border), nothing down there will change. Unfortunately, they have to be given no options, other than to fix their country themselves.

Posted by dd606 | Report as abusive
 

Mexico is a bigger country than Panama. Even though it has problems is still one of the biggest economies of the world is the 12 biggest economy in the world. With the reforms it will bring more private investment and more opportunities to the Mexicans. The Education Reform will help them to be more competitive . Mexico already graduate more Engineers than the USA. They just need to implement a better structure to increase on human capital. Mexico will soon become one of the biggest economies of the world. The USA depends as much as Mexico as Mexico depends on the USA. Mexico buys the most made American Products more than any BRIC country.

Posted by Jaguiler | Report as abusive
 

I was being sarcastic. No, I doubt the nation of Mexico would willingly join the USCA.

Posted by tmc | Report as abusive
 

Mr. Regenstreif seems to know little or nothing about reality on the ground in Mexico. Mexico is a failed state. The government is a criminal organization. The justice system is in total collapse and has always been. 99% of all crimes committed are never brought to justice. The economy is strapped in all directions by monopoly and oligarchy. And the elites are at war with eachother (60,000 killed in the past six years). And Mr. Regenstreif thinks this is a formula for economic growth? Mexico will continue to devolve into total chaos since the elites do not want to reform the only thing that can save the country: the justice system. The President bought the last election by handing out supermarket gift cards to the poor. His reforms are nothing more than re-arranging the deck chairs on the Titanic.

Posted by Bartboy | Report as abusive
 

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