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Trade Policies and Fiscal Discipline Improve Mexican Economy

19 Jul 2012

Mexico’s Economy: A Thumbnail Sketch

Currency: Mexican Peso

GDP Rate of Growth:  2010 = 5.4%
2011 = 3.8%

Central Bank: Banco de México (main objective: achieving stability in the purchasing power of the national currency).

Strengths: Rich biodiversity and varied wildlife; extensive road networks; 5th largest oil producer in the world; 8th most visited country in the world; second largest single securities market in Latin America (“The Mexican Stock Exchange”); abundant mineral resources and leader in the production of silver; regional and bilateral free trade agreements with over 40 countries

Principle Industries: Aircraft, automobile, petrochemicals, cement and construction, electronics, textiles, food and beverages, mining, consumer durables, and tourism

Mexico’s economy is free-market in its structure.  It is the trillion-dollar range in size. It contains a blend of contemporary and obsolete industry and agriculture, fisheries and farming, but it’s increasingly dominated by the private sector and receiving large influxes of foreign direct investment.

Mexico has undergone weighty and positive economic changes since the mid-1990s. It has endured swift and remarkable improvements in building a modern, expanded economy, developing infrastructure, and confronting poverty. In 1983, Mexico’s economy was still protectionist in nature. The government was openly critical of multinational economic cooperation. Today the country benefits from a more open economic and political system that is highly integrated with the world economy. The new president, Enrique Peño Nieto, has a goal to reach a level of 6% economic growth.

Although the economic crisis hit Mexico hard in 2009, an IMF report stated that Mexico rebounded strongly from the global crisis. The report attested to its strong fundamentals and skillful policy management. The macroeconomic landscape in Mexico appears increasingly desirable; foreign reserves are up, trade with the U.S. is thriving, and Mexico’s inflation rate is one of the lowest in the region.

The media reflection on the drug war has, for the time being, diverted investors' awareness from the superior economic position that Mexico finds itself in today. Once the drug war subsides, there will be a greater recognition of Mexico’s manufacturing and economic potential.

Mexico's economy could be one of the most appealing nascent markets in the world. It has become a redoubtable exporting power—exports were the source of 2% of the GDP in the 1980s. They now account for twenty-four percent. Whereas Mexican exports were almost entirely comprised of oil exports, today the country exports automotives, aerospace components, appliances, medical devices and host of other high value consumer and industrial items. The percentage of exports that the U.S. sources from Mexico is over twelve.

Mexico and U.S. Economic Health Compared

The above graph demonstrates that the key variables of Mexico’s macroeconomic stability have been very consistent. When compared to the U.S., Mexico’s macroeconomic variables exhibit greater health and stability. **Note the stability of the inflation and unemployment rate in Mexico around the time of the economic crisis.

The U.S. and Mexico share strong economic bonds that have been concretized by the NAFTA, which has been in effect since 1994. Mexico’s economy depends significantly upon the U.S. as an export market. Exports accounted for 32% of Mexico’s GDP in 2010 and over 80% of Mexico’s exports are headed to the U.S.

Currently, the U.S. is in a negative economic state when compared Mexico. The security of Mexico’s economy has allowed it to surpass the U.S. in many macroeconomic areas. Mr. Richard Fisher, President of the Federal Reserve Bank of Dallas, recently told the Mexican Stock Exchange that the U.S. Congress and its presidential candidates should “take a chapter from Mexico’s book on implementing real fiscal reform. They might well benefit by broadening their perspective on Mexico; from focusing solely on illegal immigration and drug and gun trafficking…”

Mexico has lower levels of debt and lower fiscal deficit than the U.S. Mexico has also administered a balanced budget whereas debt has risen to perilous levels. Mexico’s national debt is about 27% of its GDP, while the U.S.’s debt-to-GDP ratio was 99% in 2011 and is expected to hit 116 percent in 2012. In 2010, Mexico’s economy experienced a higher than expected growth rate of 5.0% whereas the U.S. economy experienced a growth rate of 2.8%.

Mexico’s Economic Goals:

Safeguard Economic Solidity

o Maintain fiscal control with balanced budgets;

o Create incident funds;

o Reform the public pension by transforming it to an individual account system with a minimum guaranteed pension;

o Respect the sovereignty of Banco de México;

 • Endorse the rule of law

o Zero lenience for impunity and distortion;

o Modernize the police forces and justice system;

o Wrestle against tax prevarication and smuggling;

o Impose the new Competition Law.

• Improve Mexico’s competitive stance

o Advance a more competent tax system to intensify public finances and heighten investment and job creation;

o Amplify the competitiveness and effectiveness of the energy sector;

o Fortify the financial system to be an efficient liaison for national savings and feed for investment;

o Ensure a dynamic telecommunications sector, with fair competition under a strong regulatory authority and clear rules;

o Sustain small and medium size businesses and assimilate them into the mainstream;

o Sponsor innovation and technology development;

o Restructure the government.

• Promote state and local development

o Promote tourism;

o Renew usual agriculture;

o Invest in transportation;

o Promote sustainable economic development of forest and coastal regions.

• Increase equal opportunity through social investments

o Improve access to health care;

o Support programs to fight undernourishment;

o Increase education access;

o Increase access to university scholarships;

o Boost availability of housing;

o Reinforce the mortgage market;

o Create a amalgamated property registry;

o Reduce red tape for construction permits and real estate transactions.