Economy and Trade
Mexico is the second-largest economy in Latin America. It is highly dependent on the US economy, which accounts for around 80% of the country’s exports. Furthermore, millions of Mexicans work in the United States and the remittances they send home are a vital source of foreign exchange. Indeed, remittances are the second-biggest source of foreign-currency inflows, behind oil exports, and comprise around 3% of the country’s gross domestic product. Mexico’s integration with the United States has deepened since the establishment of the North American Free Trade Area (NAFTA, covering the United States, Canada and Mexico) in 1994. Trade between the three partners has increased by more than 10% a year since the agreement, which paved the way for tariffs to be cut on key products. The service sector is the largest component of GDP (70.5%), followed by the industrial sector (25.7%). Agriculture represents 3.9% of GDP. Mexico is the fifth-largest oil producer in the world (3.8 million barrels per day), although its reserves are declining.
Economic Policy over 12 Months
Mexico is considered one of the better-managed emerging economies and has enjoyed relatively stable economic growth during the current decade—growth averaged 3% each year between 2000 and 2007. However, there are stark divisions between rich and poor. In 2008, the OECD ranked Mexico bottom of 30 developed and developing countries in terms of economic income inequality. The wealthiest 10% of Mexicans earn more than 25 times as much as the poorest 10%. Around 40% of the population are poor and 18% are considered to live in extreme poverty, according to official estimates.
The global economic slowdown is exacerbating these divisions and the authorities have been very active in adopting measures to calm financial markets and counter the impact on the domestic economy. In October 2008, President Calderon unveiled a revised budget for 2009, which will result in the first budget deficit in several years. The budget includes a 13% spending increase on infrastructure and other projects to stimulate growth and prevent job losses.
The government plans to use 145 billion pesos (US$10 billion) saved in three stabilization funds to help cover the costs of the increased spending and to compensate for falling tax income as the economy slows. In 2008, Mexican officials at Pemex, the state-owned oil monopoly, also bought options to sell 330 million barrels of Mexican crude for US$70 a barrel—which guarantees the country at least US$9.5 billion in extra income if oil prices stay below that level.
Also in October 2008, the authorities announced various measures aimed at easing the liquidity squeeze in domestic financial markets. Critically, the Treasury announced that it would favour short-term paper over long-term bonds in order to ease constraints on long-term funding availability. In addition, and along with the central banks of Brazil, Singapore and South Korea, the Mexican authorities announced the establishment of temporary reciprocal currency swap lines with the US Federal Reserve.
The currency swaps provide each of the foreign central banks with up to US$30 billion to lend to banks in their jurisdictions to ease dollar funding conditions. The arrangement, which is set to remain in place until 30 October 2009, signals the Federal Reserve’s commitment to supporting large, well-managed emerging markets that have been suffering severe contagion from global financial-market turmoil despite solid domestic fundamentals.
The Mexican central bank, Banco de México (or Banxico), has kept a tight rein on monetary policy in order to contain inflation. The central bank cut interest rates by 50 basis points in January 2009, to 7.75%. It was the first fall in borrowing costs in nearly three years. The central bank is expected to cut the key interest rate aggressively in 2009 to help the economy.
Economic Performance over 12 Months
The global economic slowdown and the credit crunch have had a significant impact on the Mexican economy, choking exports and investment. The economy expanded by 1.5% in 2008, according to the central bank, after recording 3.2% growth in 2007. Conditions worsened markedly in the fourth quarter of 2008, when the economy shrank by 1%. Despite the government’s measures to stimulate growth, the central bank forecast in February 2009 that it expected the economy to shrink by 1.16% in 2009. The economy last contracted for a full year in 2001, when it shrank by 1.6%.
The recession in the United States is hitting remittances and exports. Money sent home by Mexican emigrants, mostly in the United States, fell by 3.6% to US$25 billion in 2008—the first drop on record, according to the central bank. The fall is thought to have been caused by a crackdown on illegal immigration and migrant job losses as the US recession leads to widespread layoffs.
Meanwhile, the Mexican Institute of Finance Executives’ manufacturing index fell to 42.9 in January 2009, from 43.8 in December 2008—its seventh straight month below 50, reflecting a sharp drop in demand for exports to the United States. A slump in the price of oil has also hit export revenues. However, the decision to hedge against declining oil prices (see Economic Policy) and the government’s cautious fiscal policy mean that the country has fared better than less prudent oil exporters.
Mexico has also avoided the housing speculation seen in the United States. Mexico’s financial system has been stringent in extending credit. The IMF reported in December 2007 that commercial banks were well capitalized, profitable and liquid, and non-performing loans remained low.
A sharp depreciation of the peso in the latter half of 2008 fuelled inflation, which reached an eight-year high of 6.53% in 2008, above the central bank’s 6.0% target. The falling peso offset the impact of a sharp drop in oil and non-oil commodity prices in the fourth quarter of 2008. Inflation exceeded the central bank’s target of 6% in 2008. By February 2009, the central bank had spent nearly US$16.6 billion from its reserves to defend the peso since October 2008. Between August 2008 and February 2009, the peso lost 30% of its value.
Support for Inward Investment and Imports
Mexico is open to foreign direct investment (FDI) in most economic sectors and has consistently been one of the largest recipients of FDI among emerging markets. ProMexico is the federal entity charged with promoting Mexican exports around the world and attracting foreign direct investment to Mexico.
The Economy Ministry maintains a bilingual website (www.economia.gob.mx) that provides information and downloadable application forms for import/export permits. Interested parties can also make online tax payments and communicate with online advisors who can answer specific investment-and trade-related questions.
The 1993 Foreign Investment Law governs foreign investment in Mexico. The law is consistent with the foreign-investment chapter of NAFTA. US and Canadian investors generally receive national and most-favored-nation treatment when setting up operations or acquiring firms. The Mexican Federal Government has eliminated direct tax incentives, with the exception of accelerated depreciation.
GDP growth: 1.5% (2008 est.)
GDP per capita: $14,400 (2008 est.)
CPI: 6.5% (2008)
Key interest rate: Commercial bank prime lending rate 7.56% (31 December 2007))
Exchange rate versus dollar: Mexican pesos (MXN) per US dollar—11.016 (2008 est.)
Unemployment: 4.1% plus underemployment of perhaps 25% (October 2008)
FDI: US$278.9 billion (2008 est.)
Current account deficit/surplus −US$13.45 billion (2008 est.)
Population: 109,955,400 (July 2008 est.)
Source: CIA World Factbook except where stated