Mexico Navigates Macro Economic Headwinds with Trade Partnerships, Foreign reserves and a Stable Government.
Mexico has the second largest economy in Latin America and the fourth largest in the Americas. This emerging market has weathered the global storm and is well positioned to tap into the momentum from the growth of its main export partner, the U.S. The Mexican economy is forecasted to grow 2.5 percent in 2015, down from 2.99 percent in 2014, an impressive feat considering the macro-economic environment. The Mexican central bank has been forged by the Peso crisis of 1994 and the lessons learnt from that experience have helped the nation better prepare the economy against global shocks. Foreign reserves stand at 193,336 million dollars (the eleventh highest foreign reserve in the world, by USD reserves) and have been used responsibly by the Banco de Mexico to protect the currency against swift depreciation.
The top four Mexican exports are vehicles, electronic equipment, machines and oil. Mexico was able to transition out from a low value added manufacturing nation into a specialized producer of autos and heavy machinery. While energy has always played a big role in exports, the current decade low price of crude has limited the growth in that sector but comes with a silver lining as it has also put downward pressure on inflation. The slowdown in the energy sector has been more than offset by the growth in manufacturing that has reduced unemployment and boosted steady growth.
Turning a Weak Currency into an Advantage
The local currency Mexican Peso (MXN) has touched record lows in September after the Federal Reserve held the American interest rate at 0.25 percent and kept markets guessing on when it will finally raise the benchmark rate. A strong trade partnership with a fast recovering U.S. and a weak local currency will allow Mexican exports to gain a competitive edge.
Mexico Looking to Diversify its Export Destinations
Mexico has always hedged its U.S. exposure by signing a large number of trade agreements around the world. The fact remains that the U.S. is still its main export destination, with more than 70 percent of Mexican products landing in America. Mexico is looking to diversify away from the U.S. by becoming a member of the Trans-Pacific Partnership (“TPP”) of 12 nations that will represent nearly 40 percent of the world’s gross domestic product. The TPP proposes a healthy balance of developed and emerging nations. Japan is the only other nation to overlap between the top 10 destination for Mexican exports and future TPP members so the opportunity to increase trade figures is massive.
Stable Government Follows Through with Reforms
Political stability has hit some roadblocks but the government still enjoys considerable goodwill after the presidential elections three years ago. Reforms were pushed through that allowed foreign capital to re-activate state run enterprises and updated labour laws that have helped in reducing unemployment. Taken in the global context, the Mexican political environment is stable and displaying the normal growing pains of a modern democracy.
A stable government delivering a strong economic agenda has made Mexico a resilient emerging nation that received the coveted investment grade rating A3 from Moody’s in February, 2014. With Mexico seeking to diversify its trade partnerships and continue the structural reforms that have helped reposition the country as a story of Latin American success, it is in no danger of losing its coveter investment grade rating.