Americas Market Intelligence

Pestalozzi 923
Colonia del Valle, Mexico DF 03100
+52 (55) 5335-1712
www.americasmi.com

August 2012

Mexicos economy still looks strong

despite its politics
Mexico has been plagued with a tarnished image in recent years as the foreign press has
chronicled the countrys ills, from the ongoing drug war to corruption within government
institutions. The countrys recent presidential election on July 1st has added one more element
of controversy to the list as the press has reported fraudulent vote-buying tactics on the part of
the victorious PRI party. 1
Despite being officially declared the winner, Enrique Pea Nietos election has been tarnished
by accusations of fraud, placing doubt on the incoming presidents motives and integrity; the
unfolding scandal has also revived old fears about the partys long track record of corruption
and political manipulation, while complicating the president-elects efforts to focus on the
countrys pressing challenges. As things stand, Mr. Pea Nieto will not enjoy the traditional
honeymoon following victory at the polls in the months leading up to his swearing in as the
new head of state on December 1st. Instead, the transition of power looks set to occur amidst a
storm of controversy, legal challenges, and growing fears among voters about the implications
of the return of the PRI to power for transparency and democracy.
In spite of these unflattering headlines, the countrys economic fundamentals remain strong
and are unlikely to be undermined by the political shenanigans of the presidential election.
This is in large part due to the success of last two PAN administrations in enacting sound
macroeconomic policies and strengthening the domestic economy. 2 In times of instability,
volatile markets, and general malaise, it is welcome news to see the country still pushing for
stability, even in light of civil protests at the unfolding electoral scandal.

Sound economic management has led to a strong rebound since

the global crisis
The outgoing administration will hand over the reins to the PRI just as the economy is
rebounding following the 2009-2010 crisis. This rebound is primarily due to the sound
economic policies of the last 14 years. Mexicos real GDP has averaged a steady growth of
2.37% between 2003 and 2011, reaching US$ 1.13 trillion in 2011 (see graph 1). Among the
policies that contributed to this favorable track record, four stand out and are likely to remain a
centerpiece of the incoming administrations economic strategy.

The Partido Revolucionario Institucional (Institutional Revolutionary Party or PRI) came in first with 38% of the
vote; a partial recount following challenges by the PRDs candidate (who came in second) actually showed a
slight increase of the PRIs tally, at approximately 39% of the vote.
2
The Partido de Accin Nacional (National Action Party or PAN) held the presidency from 2000-2006 under
Vicente Fox and from 2006-2012 under Felipe Caldern.

A primary contributing factor to Mexicos economic stability was the introduction and growth of
consumer credit starting in 2001. In a country where cash has always been king, Mexicos
consumer credit expansion was never a foregone conclusion, especially since it began with
the introduction of only nominally low-interest credit cardswhose 20% APR were
considered cheap credit at the time. Since then, consumption growth and credit growth trends
have matched each other; and in 2009 and 2010 consumption growth even outpaced credit
growth (see graph 2).

Private consumption in Mexico has been growing at an average rate of 5% per year since
2001, reaching US$ 739 bi in 2011, the equivalent of US$ 6,490 per capita. Putting this into
perspective, India has a per capita consumption of US$ 879, China of US$ 1,810, and Brazil of
US$ 7,740.

STRICTLY PRIVATE AND

CONFIDENTIAL

Simultaneously, Mexico ran a (nearly) balanced budget from 2004-2008, which has also
played a significant role in providing stability to the economy. The government incurred a
higher budget deficit only when the global economic crisis came about, and even at the height
of the crisis in 2009, the deficit was a mere 2.4% of GDP. As a result, Mexicos debt-to-GDP
ratio remains in a reasonable range at 46%, compared to 71% in India, and 67% in Brazil.
Meanwhile, Mexico maintained inflation under control; the inflation rate was 3.8% in 2011,
lower than in any of the BRIC countries.
Industrial production has been one of the key engines of the Mexican economy and will remain
an economic pillar in the foreseeable future; at its heart is the maquila sector, focused on
exporting goods to foreign markets, primarily to the United States. When global consumer
demand came to a standstill in 2008, Mexican industrial production ground to a halt, and even
shrank by -7.6% in 2009, but the maquila sector weathered the crisis better than other regions.
Though the drop in production was considerable, it was moderate compared to the 11.4%
decrease in production in the United States and the 13.6% decrease in Europe during the
same period. Additionally, industrial production rebounded soon afterwards, posting growth of
6% in 2010 and 4% in 2011.
Finally, the 2009 recession provided an unexpected opportunity for the economy to diversify its
export markets. The drop in demand from its primary market pushed Mexican producers to
look beyond the United States for new markets in which to sell their products. While the United
States remains Mexicos leading trading partner, Mexican export manufacturers have been
able to diversify their export base looking to new markets such as China, India, Colombia,
Brazil as well as other countries of Latin America. As a result, the share of Mexican exports
going to the United States decreased from 90% in 2001 to 79% in 2011.

Looking forward: prospects for sustaining the rebound in growth

Despite the inauspicious aftermath of the election, there is little doubt that Mr. Pea Nieto will
assume the presidency on December 1st, by which time most of the current upheaval will likely
have died down. By then, the new president will be firmly focused on his policy agenda.
If Mr. Pea Nietos time as Governor of Mexico State is any indication of his actions as
President, it is likely that the country will maintain a conservative posture with regard to public
finances and fiscal management. Having run a balanced budget in his home state while in
office between 2011-2006, the President-elect will likely adopt a similar posture of fiscal
prudence. Additionally, it is likely that inflation will remain moderate, between 3%-5% and with
oil prices remaining high the government will have a strong platform from which to drive
economic policy.
That said, the prospects for economic and structural reform are less clear. The PRI will not
have an absolute majority in either the Senate or House of Representatives when the new
Congress begins on September 1st. Mr. Pea Nieto will have to negotiate with other parties in
order to get legislation approved. Between them, the PRI and the PAN together account for
over 70% of the votes in Congress, 3 which allows for the possibility of a negotiated
convergence in legislative policies, keeping Mexico on its stable path forward. While progress
3

In the Senate: PRI + PVEM, 32% and PAN, 39%; In the House of Representatives: PRI + PVEM, 52% and PAN
28%.

STRICTLY PRIVATE AND

CONFIDENTIAL

on issues of transparency and democracy remain uncertain at best, the fact that Mexicos hard
earned economic stability will not be compromised is welcome news.

Guillaume Corpart is the Managing Director of Americas Market

Intelligence and a veteran of Latin American competitive intelligence and
strategy consulting.
gc@americasmi.com | www.americasmi.com

STRICTLY PRIVATE AND

CONFIDENTIAL