Latin America is a region of growing prominence. Brazil has been the star in recent years, but a number of other strengthening economies also fared better than the developed western economies during the 2008-09 financial crisis and beyond. Chief among these is Mexico, a country which has long been considered one to watch and is now beginning to realise its full potential.
Indeed, as Brazil’s economic success story has recently been tempered by declining confidence and structural impediments, Mexico’s economy has expanded at an increasing pace. The country’s gross domestic product (GDP) growth reached 5.5% in 2010 – the highest rate in a decade – and a relatively swift recovery from the global financial crisis has been followed by a resistance to the market difficulties that continue to hinder growth elsewhere.
The root cause of this growth has been Mexico’s huge surge in exports. With volumes reaching an all-time high of nearly US$350bn in 2011, Mexico’s rising export levels have been aided by the country’s free trade agreements with over 50 countries. This pick-up in exports has been so significant that a shift can be seen in Mexico’s economy, with new players consisting of local banks and non-bank financial institutions (NBFIs) now entering, or expanding their presence in, the trade services sector. The rise of the country is something that treasurers should already be familiar with and increasingly trade and foreign exchange (FX) mechanisms for dealing with Mexico will become essential for large multinational corporations (MNCs).
The spike in both intra-regional and international trade provides an attractive opportunity for forward-thinking organisations. Fuelled by a domestic manufacturing sector that has become increasingly competitive over the past decade, Mexico’s swelling export industry has been facilitated by closer ties with other emerging markets, as well as a western downturn that has accelerated the rise of so-called ‘south-south’ trade. With well-capitalised banks and, along with Brazil, the most developed NBFI sector in Latin America, Mexico’s financial institutions (FIs) and indeed adventurous corporate investors are well placed to realise this opportunity. These players may require the assistance of global partners in developing full back-office investment and oversight capabilities and leveraging a truly global network but, with such support, they can more ably take advantage of Mexico’s growing trade sector. In doing so they will, in turn, help consolidate recent and rapid trade sector growth into sustained development for the wider economy.
Short Term Challenges: Aztec Tiger to Roar?
There are a number of hurdles that must still be overcome if Mexico is to truly earn the title of ‘Aztec Tiger’ and roar fully. First and foremost is the country’s continued reliance on its immediate neighbour to the north, the US, as its primary export market. While Mexico’s increased trade has supported the economy’s recent development, a significant percentage of the country’s exports are in response to North American demand. As the US economy addresses its own challenges, from sluggish growth to instability arising from the continued threat of the ‘fiscal cliff’, Mexico’s trade sector can quickly be affected. In fact, such close ties with the US economy and its on-going difficulties have already had an impact on Mexico’s economy, with full-year growth in 2012 at 3.9% of GDP; although healthy and stable, significantly lower than the 2010 peak of 5.5%.
There are, of course, other factors: the sovereign debt crisis in the eurozone is also accountable for the recent slowing of the previously rapid rate of growth. But Mexico’s close trade ties with the US will keep its future development closely aligned with the economic health of its larger neighbour to the north and may continue to act as a brake on Mexico’s growth in the short term.
Long Term Potential
In the long term, however, Mexico should benefit from the close relationship with the US. Although US GDP fell at a 0.1% annual rate in Q412, the strength of consumer spending and business investment suggest that the American economy’s recovery will continue, returning to slow but steady growth later this year. Furthermore, the US’s pursuit of energy independence is likely to change the country’s fortunes and, in turn, increase its demand for Mexico’s manufacturing exports.
Even with these current US-related challenges, Mexico’s economy has remained relatively healthy. The country’s rate of growth has not kept up with its regional neighbour, Peru – which experienced 6.3% growth in 2012 – but, bolstered by strong domestic demand, Mexico is far better positioned than the flagging economies of Brazil and Argentina. Indeed, Mexico’s economy is tipped to outpace that of Brazil by 2022, and a US$57bn influx of foreign investment was directed into Mexican stocks and bonds during the first nine months of 2012; a sign of rising confidence in the country’s future.
Moreover, Mexico is looking further afield and working to expand and strengthen its non-US trade connections. Domestic exporters, aided by local financial focusing more on trade services, have widened their sphere of interest to include other markets; in particular those in Latin America, Africa and Asia, as well as in some European countries. Indeed the signing in June 2012 of the ‘Pacific Alliance’, a regional initiative formed along with Chile, Peru and Columbia to encourage greater trade with Asia, signifies the country’s ambition to build on its already-strong trade ties and encourage south-south trade.
Looking to the Future
The opportunity for Mexico is clear. But, to realise its potential, efforts such as diversifying and deepening the country’s trade flows must continue; not just through intra-regional trade pacts, but also by encouraging domestic FIs to develop the back-office capabilities necessary to support and facilitate international trade. Likewise, structural reforms will be critical to the continued development of the country’s economy and to growing its role on the international stage. A more structured, transparent and sophisticated economic environment will further encourage foreign direct investment into the economy.
While Mexico still has some distance to go before it can claim and consolidate its place on the international stage, its healthy economy holds strong potential. It should continue to prosper on the back of rising levels of international trade, and appears set for a bright future as Latin America’s economic powerhouse.
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