Investors were flush with optimism for Mexico even before Enrique Pena Nieto was elected as president in July of last year. The promise of economic reforms to accelerate growth simply amplified the volume of capital that had already been pouring into Mexico in search of higher yields. Market observers (and economists) were also part of that Mexico euphoria. From November to April, there were very few audible notes of caution regarding Mexico’s immediate economic outlook or the fully valued equities market (at the time, we took particular interest in article 1).
Mexico will undoubtedly benefit from several key structural advantages over the medium term, such as:
- A wage-adjusted highly productive labor-force
- Close proximity to both the US and ‘fast’ growing South America
- Sound macro policies, the absence of capital account controls and highly liquid FX and sovereign debt markets.
There are other factors, however, which introduce risks to stability:
- The amount of foreign portfolio inflows (particularly in sovereign debt due to both the 2010 WGBI inclusion and investor search-for-yield) over recent years has been massive: foreign portfolio investment increased by almost 80% during the last three years, from $200 billion at end-2009 to $355 billion in mid-2012 (p. 38/39).
- Financial markets have nearly fully anticipated passage of key legislation such as energy and tax reform which are both likely and necessary, but not guaranteed (1, 2).
- Although Mexico has 12 free trade agreements involving 44 countries (more than any country in the world), it is still primarily reliant on its US links.
- Mexico’s productive capacity is heavily weighted toward auto manufacturing—one of the most cyclical industries on the planet.
Please review Dashboard – Mexico in which we analyze the recent economic trends in Mexico and their impact on broader activity: Dashboard – Mexico (Fall 2013)