NAFTA
    FUND
Mexico: A BRIC in
 North America




                    January 2007
Index



I.           Is Mexico a North American Economy?

II.          Is Mexico a BRIC?

III.         Challenges

      ...
I. Is Mexico a North American
                    Economy?
Is Mexico a North American Economy?

                                                      Economic Cycle
       Mexican e...
Is Mexico a North American Economy?

                                                    Exchange rate volatility

       ...
Is Mexico a North American Economy?

                                                                                     ...
Is Mexico a North American Economy?

                                                               Short term interest ra...
Is Mexico a North American Economy?

                                                    Yield Curve

        Moreover, th...
Mexico is a North American Economy




                              II. Is Mexico a BRIC?
Is Mexico a BRIC?

                                              Large Economies, 2004
                                   ...
Is Mexico a BRIC?

                                      Population over 50 million, 2004
                                ...
Is Mexico a BRIC?

                             Goldman Sachs Growth Environment Score*
                                  ...
Is Mexico a BRIC?

                                                       Comparative indicators
                         ...
Is Mexico a BRIC?

                                                        Convergence
             After China, Mexico is...
Mexico is a BRIC




                   III. Challenges: Short Term
Challenges: Short Term

                                                                                                In...
Challenges: Short Term

                                       Economic Expectations 2007
                                ...
Challenges: Short Term

                                                                                                  ...
Challenges: Short Term

                                                    Public Finance

                              ...
III. Challenges: Long Term
Challenges: Long Term

                                                                               Openness

          ...
Challenges: Long Term

                                                                         Trade

        Since the s...
Challenges: Long Term

                                                               Investment
       Foreign direct inv...
IV. Recommendations
Recommendations

                        A BRIC in North America

§   Legal and institutional framework needs to be streng...
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Mexico a BRIC in North America 2007

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Luis Perezcano makes the argument that Mexico is part of the North American economy and should be part of the BRIC countries.

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Mexico a BRIC in North America 2007

  1. 1. NAFTA FUND Mexico: A BRIC in North America January 2007
  2. 2. Index I. Is Mexico a North American Economy? II. Is Mexico a BRIC? III. Challenges i. Short Term ii. Long Term IV. Recommendations to liberate growth potential 1
  3. 3. I. Is Mexico a North American Economy?
  4. 4. Is Mexico a North American Economy? Economic Cycle Mexican economic cycles are strongly linked to those of the US. Mexican manufacturing GDP growth rate and USA industrial production NAFTA TLCAN 15% Corr: -0.07 Corr: 0.67 10% 5% 0% -5% US Industrial Production Producción Industrial EUA -10% Mexican manufacturing DGP PIB Manufacturero México -15% 1988/03 1987/04 1989/02 1990/04 1993/04 1994/03 1996/04 1998/02 1999/04 2002/04 2004/02 1987/01 1990/01 1991/03 1992/02 1993/01 1995/02 1996/01 1999/01 2000/03 2001/02 2002/01 2003/03 1997/03 Chow s test shows significative evidence (F = 6.88) of a structural change in the economic cycles correlation as a result of NAFTA implementation. Source: INEGI, Federal Reserve Board. 3
  5. 5. Is Mexico a North American Economy? Exchange rate volatility Exchange volatility has converged toward levels of the major currencies. Moreover, the new floating exchange rate policy has allowed to adequately absorb external economic shocks. 45% 40% 35% 30% 25% Canadian dollar German mark/ Euro 20% Japanese yen 15% Mexican peso 10% 5% 0% Ene/94 Ene/98 Ene/04 Ene/95 Ene/96 Ene/99 Ene/00 Ene/01 Ene/02 Ene/03 Ene/05 Ene/06 Ene/97 Source: www.oanda.com. 4
  6. 6. Is Mexico a North American Economy? Inflation Inflation has converged towards comparable levels between USA and Canada. 55% 50% 45% Canada 40% Mexico 35% U.S. 30% 25% 20% 15% 10% 5% 0% -5% Nov/99 Oct/95 Oct/02 Abr/99 Ago/94 Jun/00 Ago/01 Dic/96 Dic/03 Ene/94 Ene/01 Jul/04 Jul/97 May/96 Feb/98 May/03 Feb/05 Mar/95 Mar/02 Sep/98 Sep/05 Source: INEGI, Federal Reserve System & Bank of Canada. 5
  7. 7. Is Mexico a North American Economy? Short term interest rates The short term interest rates have reached historic lows and are converging toward US and Canadian levels. 90% 80% 70% 60% Canada 50% U.S. 40% Mexico 30% 20% 10% 0% Oct/93 Oct/96 Oct/99 Oct/02 Oct/05 Abr/98 Abr/04 Abr/95 Abr/01 Ene/93 Ene/96 Ene/99 Ene/02 Ene/05 Jul/94 Jul/00 Jul/03 Jul/97 1 month rates Source: INEGI, Federal Reserve System & Bank of Canada. 6
  8. 8. Is Mexico a North American Economy? Yield Curve Moreover, the financial markets have deepened, as is evidenced by the evolution of the yield curve. 90% Mar-95 80% 70% 60% 50% Jan-95 40% 30% Jan-00 May-00 20% Apr-03 May-04 10% Feb-07 0% 3m 1yr 3yr 5yr 10yr 20yr 30yr Source: Banco de México 7
  9. 9. Mexico is a North American Economy II. Is Mexico a BRIC?
  10. 10. Is Mexico a BRIC? Large Economies, 2004 (data in billions of USD) China ($1,932) Argentina ($153) India ($691) Malaysia ($118) Mexico ($677) Venezuela ($110) Brazil ($604) Czech Republic ($107) Russia ($581) Hungry ($101) Turkey ($303) Colombia ($98) Indonesia ($258) Pakistan ($96) Saudi Arabia ($251) Chile ($94) Poland ($242) Algeria ($85) South Africa ($213) Filipinas ($85) Iran ($163) Egypt ($79) Thailand ($162) Is understood by Large Economies, those whose GDP are above 75 billions of USD in 2004. Source: ALTA Growth Capital with data from the World Bank. 9
  11. 11. Is Mexico a BRIC? Population over 50 million, 2004 Population GDP GDP per (million) (billion US$) capita China 1,296 $1,932 $1,491 India 1,079 $691 $640 Indonesia 217 $258 $1,189 Brazil 183 $604 $3,301 Pakistan 152 $96 $632 Russia 143 $581 $4,063 Mexico 103 $677 $6,573 Philippines 81 $85 $1,049 Egypt 72 $79 $1,097 Turkey 71 $303 $4,268 Iran 67 $163 $2,433 Thailand 63 $162 $2,571 South Afr. 45 $213 $4,733 Colombia 44 $98 $2,227 Argentina 38 $153 $4,026 Poland 38 $242 $6,368 Algeria 32 $85 $2,656 Venezuela 26 $110 $4,231 Malaysia 24 $118 $4,917 Saudi Ar. 23 $251 $10,913 Chile 16 $94 $5,875 Czech Reo. 10 $107 $10,700 Hungary 10 $101 $10,100 Source: ALTA Growth Capital with data from the World Bank. 10
  12. 12. Is Mexico a BRIC? Goldman Sachs Growth Environment Score* China (5.0) Thailand (4.7) Mexico (4.6) Russia (4.2) Iran (4.1) Egypt (3.9) Brazil (3.8) Philippines (3.8) India (3.7) Turkey (3.5) Indonesia (3.4) Pakistan (3.2) *Variables include inflation, government deficit, external debt, investment rates, openness of economy, penetration of phones, penetration of PC s, penetration of Internet, average years of secondary education, life expectancy, political stability, rule of law, and corruption; mostly using 2002 and 2003 data. Source: ALTA Growth Capital with data from the World Bank. 11
  13. 13. Is Mexico a BRIC? Comparative indicators Emerging markets Criteria Brazil Mexico India China Russia Market Size Population (millions) 178.7 103.8 1,079.7 1,296.5 142.8 Surface Area (sq Km million) 8.5 2.0 3.3 9.6 17.1 Technology High-Tech Exports (% of manufactured exports) 11.6 21.2 4.9 29.8 9.1 Fixed line & Cell phone subs (per 1,000 people) 587.2 544.6 84.5 499.4 508.3* Internet Users (per 1,000 people) 119.6 135.2 32.4 72.5 111.2 Economic Indicators GDP (US$ billion) 604.0 676.5 688.7 1,653.8 581.4 GNI (US& billion) 551.6 704.9 672.8 1,672.5 488.5 Inflation (annual %) 8.2 6.1 5.3 6.9 18.1 Exports (fob US$ million) 81,466.0 189,159.0 76,345.0 593,369.0 183,452.0 Imports (fob US$ million) 62,809.0 197,247.0 99,836.0 561,423.0 100,193.0 Unemployment Rate (%) 8.3 2.8 8.8 N/A 7.9 International Reserves -2005 E (US$ billion) 27.8 68.7 N/A N/A N/A Entrepreneurship Time required to start a business (days) 152.0 58.0 89.0 48.0 36.0 Trade Barriers Hgh Low Med-Low High Med-High Difficulty to transfer cash to the US Hgh Low Medium High Med-High Degree of Gov intervention in economy Hgh Medium Medium High Med-High Political Stability Index (US=100) 60.0 80.0 70.0 N/A 50.0 Foreign Policy/Relations w/ US 60.0 80.0 80.0 60.0 50.0 Political Regime Democratic Democratic Democratic Socialist/Comm Democratic Human Rights & Social Factors Poverty (% of Pop below poverty line) 22.0 18.0 29.0 5.0 21.0 Literacy Rate (% of pop age 15+) 88.6 91.0 61.0 90.9 99.4 Infant Mortality (per 1,000 live births) 33.0 23.0 65.0 30.0 16.0 Trade Agreements Mercosur NAFTA N/A N/A N/A Nuclear Threat Low Low Low Hgh Low *As of 2003. Data for 2004 not available. Source: ALTA Growth Capital with data from the World Trade Bank, Amnesty International, Latin Trade Magazine, IDC, and Core Strategies. 12
  14. 14. Is Mexico a BRIC? Convergence After China, Mexico is the most likely among the developing economies to converge to developed country income levels.* GES Index Mexico Brazil Russia India China Macroeconomic Stability Inflation 7 12 10 5 1 Government Deficit 2 11 1 12 7 External Debt 4 10 8 3 2 Macroeconomic Conditions Investment Rate 7 12 9 6 1 Openness of economy 6 9 5 12 2 Technological Capabilities Penetration of PCs 2 4 1 11 7 Phones 6 3 2 9 5 Internet 1 3 6 11 5 Human Capital Education 3 13 1 12 6 Life Expectancy 1 7 10 12 2 Political Conditions Political Stability 4 3 9 7 2 Rule of Law 5 4 9 3 6 Corruption 4 1 9 5 6 General Index 2 7 4 9 1 *Excludes Korea. Goldman Sachs Overall Convergence Index as reported in How Solid are the BRICs, Global Economics Paper 134, GS, Dec. 2005 The number in the table indicates the place in which each country ranks in the individual components of the General Convergence Index among the BRICs and Next Eleven, excluding Korea. Highlighted in red are scores below the mean. 13
  15. 15. Mexico is a BRIC III. Challenges: Short Term
  16. 16. Challenges: Short Term Inflationary Bubble The inflationary bubble forming in these first weeks of 2007 may modify the perception of the economic evolution in the short term. Inflation Inflación 6.0% 5.5% 5.0% 4.5% 4.0% ? 3.5% 3.0% 2.5% 2.0% 1Q Oct 2006 2Q Nov 2004 1Q Nov 2003 1Q Abr 2004 2Q Abr 2005 2Q Ago 2003 2Q Jun 2004 1Q Jun 2003 1Q Dic 2005 2Q Dic 2006 1Q Jul 2005 2Q Jul 2006 2Q Ene 2004 1Q Ene 2003 1Q May 2006 1Q Feb 2005 2Q Feb 2006 2Q Mar 2003 1Q Sep 2004 2Q Sep 2005 Source: Banco de México & CEESP. 15
  17. 17. Challenges: Short Term Economic Expectations 2007 Indicator Expectation 07 General Inflation 3.50% Underlying Inflation 3.30% Cetes rate (28 days) 6.86% Exchange rate at the end of the year (pesos for 11.23 USD) Mexican real GDP variation 3.49% Real variation in private sector consumption 4.00% Real variation in private sector investment 5.80% Real variation in public sector consumption 2.10% Real variation in public sector investment 4.80% US real GDP variation 2.54% Economic balance of the public sector Deficit de 0.07% Commercial deficit (millions of USD) 10,148 Current account deficit (millions of USD) 8,645 Non-oil exports variation 8.49% Oil exports variation -4.24% Source: Survey about the Expectative from the private Imports variation 8.85% sector economic Average price level for Mexican crude oil (USD per 48.58 specialists: December barrel) 2006, Banco de México. Foreign direct investment (millions of USD) 15,999 16
  18. 18. Challenges: Short Term Public Finance The price of Mexican crude oil has experimented in the last few months significant and consistent reductions. Moreover, in the absence of new exploration, the oil reserves will continue to decrease at increasing rates. Daily evolution of the price of Mexican crude oil 65.0 62.5 60.0 57.5 USD/Barril 55.0 52.5 50.0 47.5 45.0 42.5 40.0 15/Oct/06 30/Oct/06 18/Abr/06 14/Nov/06 03/Abr/06 29/Nov/06 01/Ago/06 16/Ago/06 31/Ago/06 14/Dic/06 29/Dic/06 02/Jun/06 17/Jun/06 02/Jul/06 17/Jul/06 13/Ene/07 18/May/06 03/May/06 15/Sep/06 30/Sep/06 Source: Banamex. 17
  19. 19. Challenges: Short Term Public Finance Oil Stabilization Fund In case of a reduction of the crude oil revenues associated with a decrease in the weighted average price of the barrel ( ) or a movement in the peso- US dollar exchange rate, below the threshold estimated in the Revenues Law, the (SHCP Treasury Secretariat) will dictate the terms to compensate such decreases with resources from the Fund for Stabilization of Crude Oil Revenues . In case of reaching the fund s resources limit without compensating the full revenues decrease, budget adjustments will be applied in the following order: 1. Communication and publicity expenses 2. Administrative expenses not directly linked with service to the general population 3. Expenses in personal services, with priority to any expenditure related to extraordinary issues 4. Budget savings and adjustments which are determined by all dependencies and entities in their authorized budget schedules Source: Ley Federal de Presupuesto y Responsabilidad Hacendaria. 18
  20. 20. III. Challenges: Long Term
  21. 21. Challenges: Long Term Openness The degree of openness of the Mexican economy has dramatically increased. But it begins a perception of stagnation. X+M Degree of Openness PIB 70% 53.32% 60% ? 50% 30.43 21.70% 40% 30% 20% Closed Cerrado Clos ed GATT GATT NAFTA TLCAN NAFTA 10% 0% 1984 1988 1980 1981 1982 1983 1985 1986 1989 1994 1998 2004 1987 1990 1991 1992 1993 1995 1996 1999 2000 2001 2002 2003 2005 1997 Source: Banco de México. 20
  22. 22. Challenges: Long Term Trade Since the signing of NAFTA, Mexican non-oil exports have shown significant growth; however, they also show signs of stagnation. Evolution of Mexican non-oil exports 225 TLCAN NAFTA Miles de millones de USD 200 175 181.8 150 125 100 75 50 25 44.2 7.6 0 1984 1988 1980 1981 1982 1983 1985 1986 1989 1994 1998 2004 1987 1990 1991 1992 1993 1995 1996 1999 2000 2001 2002 2003 2005 1997 Fuente: Banco de México. 21
  23. 23. Challenges: Long Term Investment Foreign direct investment has also had a dramatic increase as a result of NAFTA. Stagnation is again noticeable. Foreign Direct Investment 30,000 25,000 Millones de dólares 20,000 15,000 15,489 10,000 5,000 3,468 1,299 0 1984 1988 1980 1981 1982 1983 1985 1986 1989 1994 1998 2004 1987 1990 1991 1992 1993 1995 1996 1999 2000 2001 2002 2003 2005 1997 Closed Cerrado GATT GATT y TLCAN GATT & NAFTA 2001 includes Citigroup s acquisition of Banamex ($12.5 billions of dollars). Source: Ministry of Economy 22
  24. 24. IV. Recommendations
  25. 25. Recommendations A BRIC in North America § Legal and institutional framework needs to be strengthened § Macroeconomic stability needs to be reenforced § Labor ü Labor reform needs to be encacted ü Migration agreement with the US needs to be reached § Competition ü Private monopolies need to be broken up ü Public monopolies especially Electricity and Oil need to be privatized § Energy reform ü Public monopolies especially Electricity and Oil need to be privatized ü Private sector investment in alternative enegies needs to be allowed § Infrastructure and logistcs needs to improve with public and private investment 24

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