The Mexican economy ranks as the 13th largest economy in the world in nominal terms and the 11th by purchasing power parity, according to the World Bank. In 2010, Mexico’s economy expanded by 5.5%, representing a marked recovery from a difficult year before, and beating forecasts of 3%. The peso has strengthened against the U.S. dollar and inflation remains under control at around 3.6%, which means that unlike other large economies in Latin America, Mexico is not battling soaring consumer prices. Brazil, for example, may well attract more attention for its surging growth rates, but it is having to deal with 6.5% inflation, while in March Mexico’s dropped to a five-year low of 3.04%. Mexico’s foreign reserves are up and key trade with its neighbors to the north is booming. The strength of the country’s economy and financial system is helped in no small part to its proactive business environment and the solid regulatory supervision of the autonomous central bank, Banco de Mexico, whose governor Agustin Carstens has been credited for controling inflation. Achieving the March inflation figure, Mexico is “very close to our permanent objective of 3%,” says Mr. Carstens.
In the Doing Business 2011: Making a Difference for Entrepreneurs report, a joint publication by the World Bank and the International Finance Corporation that compares business regulation in 183 economies, Mexico leads the Latin American and Caribbean region. It ranks highest for ease of doing business and getting new enterprises off the ground: an entrepreneur can expect to start a new business in Mexico after just six procedures and in only nine days. This compares favorably with the regional averages of 10.5 procedures and 43.6 days, and considerably better than Brazil, for example, where 15 procedures and 120 days are required to launch a new venture.
“Small and medium enterprises (SMEs) represent 95% of all economic units in the country,” says Hector Rangel Domene, director of state-owned banking institutions Nacional Financiera (Nafin) and Banco de Comercio Exterior (Bancomext). “Nafin has established many programs to support SMEs, such as guarantees to financial intermediaries to lend money to interested parties. Through these guarantees, Nafin mitigates the risk of lending to this sector.”
IN MARCH, MEXICO’S INFLATION DROPPED TO A FIVE-YEAR LOW OF 3.04%, WHICH IS ‘VERY CLOSE TO OUR PERMANENT OBJECTIVE OF 3%’
THE WORLD BANK AND IFC HAVE RATED MEXICO AS THE EASIEST PLACE TO
DO BUSINESS IN THE LATIN AMERICAN AND CARIBBEAN REGION
THE COUNTRY IS ON TRACK TO SEE 4.9% GDP GROWTH THIS YEAR. IN 2010, THE MEXICAN ECONOMY REBOUNDED FROM THE GLOBAL SLOWDOWN AND EXPANDED BY 5.5%, BEATING THE ORIGINAL FORECASTS OF 3%
THE MEXICAN FINANCIAL SYSTEM WAS ABLE TO TACKLE THE INTERNATIONAL FINANCIAL CRISIS FROM A POSITION OF STRENGTH BECAUSE OF EFFORTS MADE IN RECENT YEARS TO IMPROVE THE REGULATION AND OVERSIGHT OF FINANCIAL INTERMEDIARIES
MEXICO IS NOW FIRMLY ESTABLISHED AS AN UPPER MIDDLE-INCOME NATION AND ITS RELATIONSHIPS WITH THE U.S. GO FROM STRENGTH TO STRENGTH
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The Mexican economy was dealt a harsh blow in 2009 and contracted 6.1% as President Calderon’s administration had to cope with the combined effects of the global recession – particularly in the U.S. – and declining oil production and remittance flows. That year, remittances to Mexico fell to an estimated $21.2 billion, the lowest level since 2005. Remittances are the country’s second-largest source of foreign currency, after oil. The situation was further exacerbated by the outbreak of H1N1 ‘swine flu’ in April 2009, which prompted the closure of restaurants, schools and shops for almost two weeks. The tourism industry, Mexico’s third-largest foreign exchange earner, was especially hit hard by the pandemic, with a 50% drop in income earned by foreign visitors in May 2009 compared to a year before.
However, according to a central bank report, the Mexican financial system was able to tackle the international financial crisis from a position of strength because of efforts made in recent years to improve the regulation and oversight of financial intermediaries. Such efforts contributed to a well-capitalized Mexican banking system with adequate liquidity levels. Those same strengths should enable banks to support the recovery in domestic economic growth.
Overseas trade is vital to economic growth. As an export-oriented economy, more than 90% of Mexico’s trade comes under free trade agreements. Mexico has FTAs with more than 40 countries around the world, including Guatemala, Honduras, El Salvador, the European Union and Japan.
Over the years, links between the U.S. and Mexico have gone from strength to strength. The close trade and investment relationship enjoyed by the two nations has been further bolstered by the North American Free Trade Agreement (NAFTA). Since NAFTA came into effect in 1994, Mexico’s share of U.S. imports has increased from 7% to 12%, and its share of Canadian imports has doubled to 5%.
“NAFTA has been a success story, and you can see this in the trade numbers,” says Arturo Sarukhan, Mexico’s Ambassador to the U.S. “We are the second largest purchaser of American goods abroad and we are currently the second largest trading partner with the U.S. The last quarter results for our exports to the U.S. have increased and as a result we have displaced China. On any given day there are 75,000 trucks that reach the border in both directions every day. Two-way trade is about $1 billion per day, so there is a very dynamic trade relationship. With our Canadian partners, NAFTA trade plays a very important part in world trade flows, but the challenge is how to keep this competitiveness from being eroded because there are new competitors from Asia on the world stage.”
Today, Mexico is now firmly established as an upper middle-income country. Mr. Carstens says that the output gap, which is the difference between the level of economic activity and the country’s production capacity, may close by the end of the year. The central bank also confirmed that remittances are again on the rise, increasing 5.48% between January and March over the same period in 2010. In the first quarter of 2011 there were 15.7 million transfers, 1.9% more than in the same period last year. Furthermore, the Economist Intelligence Unit expects solid GDP growth of 4.9% this year, reflecting firm prospects in the U.S. – Mexico’s closest and most important trading partner – as well as concrete signs that domestic demand in Mexico is beginning to recover.
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