When is Mexico's Moment?

Mexico's economic growth in the first quarter beat analyst expectations, sparking hopes that the country may finally be about to fulfil its potential. LatAm INVESTOR investigates the impact for investors...

Mexico’s economy surprised analysts in the first quarter by beating expectations and growing at an annualised rate of 3.2%. It was a rare bright spot as investors begin to wonder if ‘Mexico’s moment’ is slipping away.

Growing pains

Back in 2013 the ambitious reforms achieved by Mexican president Enrique Peña Nieto caused a wave of optimism among analysts. His success at liberalising labour laws and allowing private-sector involvement in the energy industry seemed certain boost Mexico’s economic growth. What’s more this coincided with a slowdown in Mexico’s main regional competitor, Brazil, and slower growth in the more commodity-dependent economies of South America. It was, many concluded, ‘Mexico’s moment’.

But in the ensuing years growth has disappointed. Instead of reaching 3.5% to 4% per year, as many predicted, it has bumped along at 2% to 2.5%, which is why the latest quarterly figure was such a welcome surprise. Mexico was unlucky to be hit with a number of temporary factors. Some were self inflicted. For example new regulation for the housing market led to the collapse of the country’s three biggest housebuilders which caused a massive contraction in the construction industry. Likewise the new, higher royalty scheme for the mining industry was also poorly timed, coming as it did in the midst of a commodity slowdown. That led to a fall in mining investment. But some woes were external. The US is Mexico’s most important trading partner so it was unfortunate that a number of one-off events, such as weather problems, hit US economic activity and negatively impacted its southern neighbour.

Looking ahead

The good news is that the Mexican economy has managed to absorb most of the factors mentioned above. The bad news, says Edward Glossop of UK-headquartered consultancy, Capital Economics, is that more headwinds are on the way. “A large fiscal squeeze equivalent to almost 2% of GDP – in response to a fall in oil revenues – is planned for 2016-17. This will weigh on domestic demand, particularly investment. Meanwhile, a rise in inflation above the central bank’s 3% target, triggered by the lagged effects of a weaker peso, will eat into real wage growth and force policymakers to raise interest rates.”

Mexico is one of the world's leading auto manufacturers

Given these new headwinds, last quarter’s figures may be as good as it gets for the next few years. Especially if Republican presidential candidate Donald Trump comes to power and interferes with Mexico’s most important trading relationship. But investors shouldn’t lose faith in Mexico just yet. The country has world-class mining, manufacturing and energy assets which are likely to drive economic growth in the medium term. It is scant consolation for Peña Nieto, who is more than halfway through his six-year term and has seen his approval ratings fall to record-lows. Yet if the Mexican economy does eventually grow on his reforms history will judge him more kindly.