Mexico’s Economy Still Looks Strong Despite Its Politics
Mexico has been plagued with a tarnished image in recent years as the foreign press has chronicled the country’s ills, from the ongoing drug war to corruption within government institutions. The country’s recent presidential election on July 1st has added one more element of controversy to the list as the press has reported fraudulent vote-buying tactics on the part of the victorious PRI party.1
Despite being officially declared the winner, Enrique Peña Nieto’s election has been tarnished by accusations of fraud, placing doubt on the incoming president’s motives and integrity; the unfolding scandal has also revived old fears about the party’s long track record of corruption and political manipulation, while complicating the president-elect’s efforts to focus on the country’s pressing challenges. As things stand, Mr. Peña Nieto will not enjoy the traditional honeymoon following victory at the polls in the months leading up to his swearing in as the new head of state on December 1st. Instead, the transition of power looks set to occur amidst a storm of controversy, legal challenges, and growing fears among voters about the implications of the return of the PRI to power for transparency and democracy.
In spite of these unflattering headlines, the country’s economic fundamentals remain strong and are unlikely to be undermined by the political shenanigans of the presidential election. This is in large part due to the success of last two PAN administrations in enacting sound macroeconomic policies and strengthening the domestic economy.2 In times of instability, volatile markets, and general malaise, it is welcome news to see the country still pushing for stability, even in light of civil protests at the unfolding electoral scandal.Sound economic management has led to a strong rebound since the global crisis
The outgoing administration will hand over the reins to the PRI just as the economy is rebounding following the 2009-2010 crisis. This rebound is primarily due to the sound economic policies of the last 14 years. Mexico’s real GDP has averaged a steady growth of 2.37% between 2003 and 2011, reaching US$ 1.13 trillion in 2011 (see graph 1). Among the policies that contributed to this favorable track record, four stand out and are likely to remain a centerpiece of the incoming administration’s economic strategy.
A primary contributing factor to Mexico’s economic stability was the introduction and growth of consumer credit starting in 2001. In a country where cash has always been king, Mexico’s consumer credit expansion was never a foregone conclusion, especially since it began with the introduction of only nominally “low-interest” credit cards—whose 20% APR were considered cheap credit at the time. Since then, consumption growth and credit growth trends have matched each other; and in 2009 and 2010 consumption growth even outpaced credit growth (see graph 2).
Private consumption in Mexico has been growing at an average rate of 5% per year since 2001, reaching US$ 739 bi in 2011, the equivalent of US$ 6,490 per capita. Putting this into perspective, India has a per capita consumption of US$ 879, China of US$ 1,810, and Brazil of US$ 7,740. Simultaneously, Mexico ran a (nearly) balanced budget from 2004-2008, which has also played a significant role in providing stability to the economy. The government incurred a higher budget deficit only when the global economic crisis came about, and even at the height of the crisis in 2009, the deficit was a mere 2.4% of GDP. As a result, Mexico’s debt-to-GDP ratio remains in a reasonable range at 46%, compared to 71% in India, and 67% in Brazil. Meanwhile, Mexico maintained inflation under control; the inflation rate was 3.8% in 2011, lower than in any of the BRIC countries.
Industrial production has been one of the key engines of the Mexican economy and will remain an economic pillar in the foreseeable future; at its heart is the maquila sector, focused on exporting goods to foreign markets, primarily to the United States. When global consumer demand came to a standstill in 2008, Mexican industrial production ground to a halt, and even shrank by -7.6% in 2009, but the maquila sector weathered the crisis better than other regions. Though the drop in production was considerable, it was moderate compared to the 11.4% decrease in production in the United States and the 13.6% decrease in Europe during the same period. Additionally, industrial production rebounded soon afterwards, posting growth of 6% in 2010 and 4% in 2011.
Finally, the 2009 recession provided an unexpected opportunity for the economy to diversify its export markets. The drop in demand from its primary market pushed Mexican producers to look beyond the United States for new markets in which to sell their products. While the United States remains Mexico’s leading trading partner, Mexican export manufacturers have been able to diversify their export base looking to new markets such as China, India, Colombia, Brazil as well as other countries of Latin America. As a result, the share of Mexican exports going to the United States decreased from 90% in 2001 to 79% in 2011.
Looking forward: prospects for sustaining the rebound in growth
Despite the inauspicious aftermath of the election, there is little doubt that Mr. Peña Nieto will assume the presidency on December 1st, by which time most of the current upheaval will likely have died down. By then, the new president will be firmly focused on his policy agenda. If Mr. Peña Nieto’s time as Governor of Mexico State is any indication of his actions as President, it is likely that the country will maintain a conservative posture with regard to public finances and fiscal management. Having run a balanced budget in his home state while in office between 2011-2006, the President-elect will likely adopt a similar posture of fiscal prudence. Additionally, it is likely that inflation will remain moderate, between 3%-5% and with oil prices remaining high the government will have a strong platform from which to drive economic policy.
That said, the prospects for economic and structural reform are less clear. The PRI will not have an absolute majority in either the Senate or House of Representatives when the new Congress begins on September 1st. Mr. Peña Nieto will have to negotiate with other parties in order to get legislation approved. Between them, the PRI and the PAN together account for over 70% of the votes in Congress3, which allows for the possibility of a negotiated convergence in legislative policies, keeping Mexico on its stable path forward. While progress on issues of transparency and democracy remain uncertain at best, the fact that Mexico’s hard earned economic stability will not be compromised is welcome news.
Guillaume Corpart is the Managing Director of Americas Market Intelligence and a veteran of Latin American competitive intelligence and strategy consulting.
1 The Partido Revolucionario Institucional (Institutional Revolutionary Party or PRI) came in first with 38% of the vote; a partial recount following challenges by the PRD’s candidate (who came in second) actually showed a slight increase of the PRI’s tally, at approximately 39% of the vote.
2 The Partido de Acción Nacional (National Action Party or PAN) held the presidency from 2000-2006 under Vicente Fox and from 2006-2012 under Felipe Calderón.
3 In the Senate: PRI + PVEM, 32% and PAN, 39%; In the House of Representatives: PRI + PVEM, 52% and PAN 28%.