After a number of years of below-trend growth, a slew of structural reforms that increased competition and, consequently, lowered telecom and energy prices, Mexico emerged as one of the better performing economies in Latin America last year, making it worthy…
After a number of years of below-trend growth, a slew of structural reforms that increased competition and, consequently, lowered telecom and energy prices, Mexico emerged as one of the better performing economies in Latin America last year, making it worthy of consideration as an investment destination in 2016.
Admittedly, Mexico’s economic performance primarily looks good in comparison to the rest of Central and South America, as growth throughout the region has notably flagged recently. Brazil’s economy, the largest in South America, likely contracted last year and with inflation running in double digits is fast losing its sheen among investors. Meanwhile, in the wake of China’s slow down, low commodity prices have hobbled most other economies in Latin America, most of which had become heavily dependent on the agricultural and mineral exports that had fuelled Chinese growth over the last decade.
Mexico too has been hurt by low commodity pricing, particularly the low price of oil. Indeed, still-falling oil prices have put heavy pressure on Mexico, as a major petroleum producer and exporter, resulting in a big dent in the capital expenditure plans of national oil company Pemex, as well as slowing down investment in the country’s recently liberalized energy exploration sector. The oil price slump has also taken a big toll on government revenues, forcing a major adjustment to the country’s public finance sector.
But the good news is that the government (and economy) seems to be finding a way to muddle through even against this substantial headwind. Early last year, the government reacted to the initial oil price shock by announcing preemptive fiscal adjustments for 2015 and 2016 and it could follow the same path if prices remain well below its assumed hedge level of $49. As part of its adjustments to meet fiscal targets, the government has continued to tap the market by undertaking its two record-breaking bond sales in the last two years.
Even so, through the end of last year, Mexican bonds were holding up reasonably well in a market that otherwise turned ugly for emerging economy debt. “Without a doubt Mexico is very much above other markets in the developing world. It offers a good combination of risk-adjusted returns and, above all, liquidity,” as Gerardo Rodgriguez explained to Bloomberg News recently. Rodriguez is a former Mexican deputy finance minister who now works for Blackrock.
The strong performance of Mexican public debt reflects a number of favourable macro-trends in the economy, including the fact that Mexico is the only country in Latin America that can lay claim to below target inflation. Mexican policymakers have also worked to foster competition in key sectors such as telecommunications and energy, helping to keep a lid on consumer prices. Mexico’s relative openness to foreign trade has also helped it take advantage of deflationary pressures in major developed economies, most notably in the neighbouring United States.
One surprising area of strength has been Mexico’s domestic consumer market, which has proven to be quite resilient in the fact of the weak oil sector. Faster than expected growth in retail sales and consumer credit helped fuel moderate growth in Mexico during the second of half of last year, in the view of Agustin Carstens, the Governor of Banxico, Mexico’s Central Bank. The slack in the labor market has also played a role, many economists said, after years of sub-par growth that only recently has shown evidence of picking up. The solid labor market recovery and a steady increase in consumer credit availability have been essential to reinvigorate consumption.
And while Banxico has made it clear that low inflation does not guarantee no rate hikes, confirmation that a weaker currency is not creating knock-on effects on inflation and that financial stability concerns may have been overdone could push Banxico to halt its hiking cycle even earlier.
Lastly, after outperforming its peers last year, the peso has been the worst performer in Latin America this year as investors sold the currency as a proxy for emerging-market risk amid forecasts for a global slowdown and a slump in China, the world’s second-largest economy. Although that will be of great help to Mexican exporters, many economists predict manufactured goods will lose their sheen to major export partners like the US.
“We believe that manufacturing exports will continue to struggle to grow in 2016, as some manufactured goods will continue to face lower demand from the US,” is the opinion of Javier Finkman, Chief Economist for South America (ex Brazil) at HSBC, in a note to bank clients. On the whole, Finkman added, “investment is expected to continue to grow, mainly supported by investment in machinery and equipment, as construction may continue to recover slowly, reflecting government’s spending cuts in 2016.”
What does this translate into as far as the Aurigin (formerly BankerBay) community is concerned? Frankly up through last year, Mexico did not contribute significantly to the flow of opportunities being brought to our membership. Indeed, as we discussed in a recent blog post, over the last 18 months, Brazil has accounted for a substantial majority of the Latin American deal flow on our platform, far outweighing the contribution from Mexico and any other Latin American economy. But this year, if we’re reading the tea leaves correctly, we would not be at all surprised to see a significant change, with a noticeable tilt northward in investment capital, with an increasing amount of deal flow will be drawn into Mexico as a result of the relative health and stability of its economy.