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Mexico – Increasingly Attractive Investment Fundamentals
By
Scott B. MacDonald
Mexico's credit fundamentals are improving – albeit at a slower
pace than in previous years. Reflecting this, Moody's has recently
changed the outlook to positive and the Latin American country could
benefit from any extended complications with SARS in Asia. Mexico remains
a relatively low cost producer of many goods and has excellent proximity
to the U.S. through NAFTA. Despite the slight contraction in first
quarter 2003 real GDP, there are signs that parts of the economy are
beginning to gain momentum, a trend which could strengthen when the
U.S. recovery becomes more pronounced.
The Mexican economy is closely linked to the U.S. When the U.S. economy
slowed in 2001 and 2002, it took the Mexican economy with it. Real
GDP growth contracted in 2001 and was weak (0.9%) in 2002. We expect
the economy to expand by 2.0-2.4% in 2003, with 3.5% growth possible
in 2004. The maquiladora sector, which has struggled over the last
two years, is beginning to see signs of recovery. The commercial banking
sector is also beginning to see an increase in activity. Other key
points to consider:
1.
Inflation forecasts are heading down. In early 2003,
inflation for the year was expected at 4.3%. The
central bank's tight monetary policy, however, is
having a positive impact, as consensus estimates
for inflation have been lowered to 3.9%. Considering
that Mexico's inflation levels were well over 10%
throughout the 1990s, this is positive news. For
the first 15 days of April, inflation was just 0.01%,
the lowest biweekly reading since April 2002. Inflation
had picked up in the late part of 2002 due to the
steep depreciation of the peso bled through into
prices.
2. Retail sales were up 4.2% in February, well above expectations and
another sign that the worst of the recession may now be over. Sales
growth in basic consumer goods has been relatively healthy for several
months now. Big-ticket items have lagged. After having fallen year-on-year
for five of the six months between August 2002 and January 2003, auto
sales were up a respectable 2.1% in February. It is expected that auto
sales are likely to continue to show ongoing strength in March.
3. Higher than expected oil prices have been a major windfall for Mexico
and will help the government make its fiscal target of a budget deficit
equal to 0.5% of GDP. Higher oil prices and better tax collection measures
bore fruit in the first quarter of 2003, as federal revenues rose 21%.
Mexico has now accumulated a 27.2 billion peso ($2.7 billion) surplus.
The government budget estimates the price of Mexican oil will average
between $23-24 a barrel, helping the state to take in 14 billion pesos
more in revenue this year than initially forecast.
4. We expect Mexico's external accounts will remain off of investors'
radar screens. Mexico's current account deficit will be equal to 2.5%
of GDP, which should easily be financed by foreign direct investment
(FDI). It will also be an improvement on 2002's current account deficit
of 2.9% of GDP. FDI is forecast at $14 billion for 2003. In addition,
Mexico has done its financing in the bond market already this year
and does not need to return.
5. There should be increased political noise as Mexico heads to the
July 6, 2003 congressional elections. However, the political risk associated
with the election is low. Both the party of President Vincente Fox,
the PAN, and the major opposition party, the PRI, share a broad consensus
on economic policy. Indeed, the PRI long dominated Mexico's political
life and the last three presidents, prior to Fox, advanced much of
the structural reforms that provide the economy its current foundation.
Consequently, if the PRI were to win the congressional elections in
July this would not represent a major shift in terms of policy. It
could result in more politicking between Congress and the Presidency
in terms of making deals to pass key legislation in the second half
of Fox's term. The PAN is coming in around 38% in opinion polls over
37% for the PRI, while the left-of-center PRD is polling around 20%.
Such an actualization of the vote would leave the Congress much as
it now - an arena where the PAN must form tactical alliances with the
PRI to pass legislation.
Mexico
has made considerable strides from the bad old days
of debt default during the 1980s. Although challenges
remain, Mexico remains one of the stronger sovereign
performers, a trend that should continue. The trick
for Mexico is to maintain fiscal discipline during
the period that it takes the United States economy
to regain stronger and sustained momentum. When the
U.S. recovery eventually comes, the country just south
of the Rio Grande will be a strong position to take
advantage of improving macroeconomic conditions in
North America.
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