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Mexico’s Outlook: Mostly Sunny, with a Chance of Hurricane

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Mexico’s economy has come a long way in the past 30 years, and although more must be done, recent structural reforms are poised to unleash a new era of dynamism—if headwinds from north of the border do not blow the economy off course.

As an open and export-oriented economy, Mexico’s potential at times seems unlimited, but the nation may be singularly vulnerable to global headwinds. With a population of nearly 130 million, Mexico is now the world’s 15th-largest economy and Latin America’s leading exporter. Before the advent of NAFTA in 1994, it was a largely oil-dependent economy, but it has since gone through tremendous structural changes, spurred by economic deregulation, strict monetary and fiscal policies, and a series of reforms. Today, the manufacturing sector contributes just over 17 percent of total GDP and accounts for 90 percent of the value of total exports. Still, there are plenty of challenges to be met: much of the economy is informal, regional income disparity is increasing, and there is low productivity among small and medium-sized enterprises (SMEs).

trump wallNUTS AND BOLTS … AND MORE
The primary sectors of the Mexican economy are manufacturing, tourism, services, agriculture, and extraction industries, including oil and gas. Exports are healthy, particularly since NAFTA, starting in 1994, dramatically increased trade between Mexico and its North American neighbors. The nation is holding its own against China, with large numbers of foreign-owned factories locating to Mexico over the past two decades. Even during the recent global downturn, Mexico continued to enjoy positive growth, and while the falling peso has led to higher-than-normal inflation, the government is taking fiscal measures to control the rate.

After capitalizing on its proximity to the vast U.S. market to develop its manufacturing base, Mexico has signed 12 free trade agreements with 46 countries. Foreign direct investment in the country was nearly US$26.8 billion for 2016. It is now an international trade hub and a top auto exporter. Oil exports accounted for 80 percent of total dollar income in the early 1990s, but today that number is just 20 percent; manufacturing exports are now the main source of foreign income. The economy grew 2.5 percent in 2015 and a further 2.3 percent in 2016. In April 2017, the unemployment rate came in at just 3.5 percent.

STRUCTURAL AND PRACTICAL TRANSFORMATIONS
The moderate growth rate may not change soon. Chamber of Deputies member César Augusto Rendón García points out that Mexico feasted on its oil bonanza when oil prices were high, allowing the country to increase its reserves and fund government-sponsored development programs. “But now,” he says, “the oil revenue is not there, and we have to somehow tighten the belt and make sure we live within our means.” 

Emilio Cadena, the President & CEO of Grupo PRODENSA, which assists foreign manufacturers setting up businesses in Mexico, says that the biggest challenge for manufacturing growth in Mexico is maintaining a competitive edge through the development of talent. The second challenge, he adds, “is logistics—the more we improve infrastructure and the faster we are to market, the more competitive we will be.” The third challenge? Infrastructure and energy. He notes that Mexico finally has “the legal framework for integrated energy and infrastructure markets” to allow investment in both sides by the private sector. 

That legal framework Cadena refers to is part of President Enrique Peña Nieto’s series of reforms, begun in 2012, that are shaking up education, energy, taxation, and other sectors of the economy. The reforms are boosting productivity growth, and according to the OECD, have the potential to add one percentage point to GDP growth over the next five years.

The OECD recently put Mexico at the forefront of reforming countries, and President Peña Nieto has noted that economic reforms “have given us the best shield against the challenges we are experiencing.”

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