Negative economic news emanating from Mexico since the start of the year overstates the challenges Mexico faces. Despite dramatically low oil prices, a depreciated peso, and unclear prospects for the Trans-Pacific Partnership trade agreement, the Mexican economy is growing, driven by fiscal restraint, recent reforms and a consistent policy of promoting deeper and more efficient trading relationships.
Economic headlines about Mexico this year have emphasized rock bottom oil prices, a volatile and depreciating peso, and unclear prospects for the Trans-Pacific Partnership trade agreement (TPP). A sharp drop in oil prices did push the peso to record lows and slammed PEMEX’s bottom-line, triggering the dismissal of its CEO and $5.5 billion in spending cuts. Despite this, the broader economy has weathered this storm pretty well. Estimated 2016 growth has been revised down and expected inflation revised up, but the economy is still projected to grow about 2.4 percent with 3.5 percent inflation—one of the best performances in Latin America and better than most advanced economies.
Economic headlines about Mexico this year have emphasized rock bottom oil prices, a volatile and depreciating peso, and unclear prospects for the Trans-Pacific Partnership trade agreement (TPP). A sharp drop in oil prices did push the peso to record lows and slammed PEMEX’s bottom-line, triggering the dismissal of its CEO and $5.5 billion in spending cuts. Despite this, the broader economy has weathered this storm pretty well. Estimated 2016 growth has been revised down and expected inflation revised up, but the economy is still projected to grow about 2.4 percent with 3.5 percent inflation—one of the best performances in Latin America and better than most advanced economies.
The impact on the federal budget was also much less than might have been expected. The government built its 2016 budget on a much reduced petroleum price which, together with greater income tax revenues generated by the 2013 tax reform, reduced anticipated petroleum revenue to just 15 percent of total revenue, down from a 33 percent average over the previous decade. Mexico further insulated government spending from oil price vo-latility by hedging the sale of about two thirds of its expected 2016 oil exports.
An additional 2.7 percent spending cut announced in early February 2016, coupled with President Peña Nieto’s promises not to raise taxes or create more debt, reinforced Mexico’s commitment to fiscal responsibility. Financial markets quickly responded to this reassuring macroeconomic message by pushing the peso price back below 18 per dollar from its record high of 19:1. Although the Mexican peso has suffered real devaluation, it has weathered the storm well compared to what we have seen recently in other leading emerging countries’ economies, both within the Americas and elsewhere.
Mexico’s relative strength is reinforced by a series of revolutionary reforms approved in 2013 affecting education, labor, banking, telecommunications, and especially energy which opened Mexico’s petroleum and electricity sectors to private foreign investment for the first time in over 50 years. Together, these reforms help explain double-digit increases in foreign direct investment in each of the past three years. Last year alone, investors poured $7.5 billion into Mexico, a 30 percent increase over 2014.
Oil prices also had a muted effect on Mexico’s external accounts since manufactured goods now account for over 80 percent of Mexican exports. This export profile is the consequence of a quarter century of pro-market reforms and a trade strategy built around 12 free trade agreements with 44 countries, with NAFTA at its core. Again, this sets Mexico apart from many of its competitors, most notably Brazil, which is paying a heavy price for its dependence on a commodity-driven export economy.
Mexico has not rested on its past successes; rather, it continues to embrace free trade as a key strategy for continued growth. A cutting-edge trade agreement when it was enacted in 1994, NAFTA now needs updating to adapt its provisions to a twenty-first century environment. Mexico aggressively sought and obtained entry into the TPP negotiations, collaborating extensively with the United States and Canada on a range of issues that, effectively, will result in a modernization of the NAFTA structure.
Twelve Pacific Rim countries signed the TPP on February 4, 2016, but polarization due to electoral politics in the United States has raised serious concerns about when—and if—the treaty will take effect.
While rooting for the TPP, Mexico has not placed all its free trade eggs in the TPP basket. It has instead coupled promotion of the TPP with other strategies to expand its trade globally and improve the quality of its trading relationship with the United States. Key among these are the Pacific Alliance trade agreement and the High Level Economic Dialogue (HLED) with the United States.
The Pacific Alliance is Latin America’s latest effort to promote regional economic integration based on free market principles. It incorporates the region’s leading market-friendly economies, the so-called “Pacific Pumas”—Chile, Peru, Colombia and Mexico.
Designed to be a twenty-first century trading arrangement, the Alliance goes well beyond eliminating tariffs. It focuses on promoting regional harmonization, building human capital, promoting innovation and entrepreneurship, creating an integrated stock exchange, and protecting the environment of its member countries, as well as aspiring to become a regional bridge to Asia.
Pivoting north, Mexico continues to collaborate closely with the United States, most recently under the auspices of the HLED, to promote regional growth, competitiveness, and global leadership through improved regulatory collaboration and border efficiency. This cooperation will also encourage human capital, entrepreneurship, and innovation. In addition to Mexico’s energy reforms, the HLED recently called for the establishment of the United States-Mexico Energy Business Council to enhance binational ties in the energy industry. Finally, with a new administration in Canada that has already signaled a strong desire to rekindle ties with Mexico, the potential for a bona fide North American engagement may finally be at hand.
Mexico is far from perfect. The constraints on growth affected by factors such as a weak rule of law, continued challenges with transparency and impunity, and improved but still challenging security are real but the unpardonable political rhetoric in the United States presidential campaign—vilifying Mexico for stealing jobs, promoting insecurity and sending criminals north—belies the reality of what Mexico is and will become. A G-14 economy that is on an unstoppable trajectory to becoming a highly competitive economy in its own right and a strategic partner of the United States, Mexico has chartered a smart path for growth that shows little sign of slowing down. Critics in the United States would do well to take note.
