Investments  

US recovery drives Mexico growth expectations

This article is part of
Where to invest in 2014 - January 2014

While structural reforms are pushing Mexico’s potential growth higher, the immediate growth prospects are also good thanks to the US’s demand recovery, increased public spending, more infrastructure investments and the gradual softening of the impact of the recent fiscal reforms on consumer and business sentiment.

Mexico is one of the few emerging economies without meaningful macro imbalances and this gives the country a big advantage relative to most other emerging markets, with room to grow faster than the 2.6 per cent average GDP growth of the past 10 years.

Firstly, the US demand recovery is becoming visible in Mexico’s export performance. Since the summer, export growth has picked up from 0 per cent to 7 per cent currently. With exports to the US representing 25 per cent of Mexican economic output, this should continue to be an important positive driver of Mexican growth as the US recovery continues. Apart from the positive cyclical factor, there is also a strong push from a solid competitiveness relative to Asian peers.

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In addition, higher government spending is an accelerant for the economy.

In the first half of the year, infrastructure investment growth had dried up, partly because of the inexperience and political games of the new government, partly because of some practical complications caused by the important new law about public-private partnerships (PPPs) that was enforced in November 2012.

Only in recent months, the bidding of private consortiums in big infrastructure auctions has started again. The concessions process in highways, railways, ports and airports looks promising. Interest is high, from Mexican companies, but also from big foreign parties. And the pipeline of projects is large with 27 PPP projects in highways and three fast-train projects.

Another positive growth driver for the short term is likely to be the gradual softening of the negative impact on consumer and business sentiment from the new fiscal reforms.

In October, the fiscal reform was approved in Congress, including new taxes on junk food and soft drinks, higher income tax for high earners, dividend tax, capital gains tax, an end to the tax breaks in the border areas and less room for tax deductions, among several other measures.

Overall, the government expects that the reform will generate higher fiscal revenues worth of 1.5 per cent of GDP. And while the higher tax burden and the long list of changes for both households and companies have affected consumer and business confidence, this negative effect on consumption and investments should not last long, as people will gain a better understanding of the changes and realise that the negative impact on disposable income or profits will not be that large.

With good growth prospects and exciting reforms taking place, Mexico is a positive exception in the emerging world. This, the strong competitiveness relative to Asia, the strong trade links with the US and the healthy macro-economic base with little imbalances are all good reasons to like the Mexican market. There is one negative point and that is the high sensitivity of the market to the expected phasing-out of US quantitative easing.