Should the trade finance market be bullish about Mexico? Eleanor Wragg reports.
Mexico, with its enviable access to the US, raft of free trade agreements (FTAs) and hefty internal market, is arguably one of the most attractive trading partners among emerging market economies.
However, as the sun sets on Felipe Calderon’s presidency, the world’s 15th largest exporter is struggling with a violent battle against organised crime, the after-effects of a painful recession and endemic corruption. The country’s cartels continue to resist the efforts of its military and police to break them; negatively impacting on Mexico’s risk and security profile, and it is estimated that criminal violence has claimed the lives of some 40,000 people since Calderon came into power.
Today, Mexico is steadily pulling its way out of one of the steepest downturns of any country in the Americas. The country’s proximity to the US cuts both ways: Mexico effectively imported the financial crisis from its northern neighbour, seeing its exports to the US, which account for about 80% of the total, plummet from US$234.6bn in 2008 to US$184.9bn in 2009.
Last year, a rise in oil prices and renewed demand from the US and its stack of bilateral deals saw the country trading more than Argentina and Brazil combined. In addition, Mexico now finds itself in the situation, all but inconceivable a few years ago, of having better public finances than the US.
The country’s economy is growing in real terms, as are the reserves of the central bank which to date are greater than US$130bn – a record figure for the country. “Our unemployment figures are lower than 6%, which compares very favourably to the double-digit unemployment figures in Europe. Our currency remains stable and hasn’t undergone devaluations as have currencies of comparable countries,” says Andoni Barinagarrementeria, director of the public sector and letters of credit at the country’s export credit agency (ECA), Bancomext.
According to Moody’s August 2011 credit report, on top of a robust international reserve position, the IMF’s US$72bn flexible credit line that was renewed earlier this year provides “sufficient comfort to allow us to conclude that Mexico appears well positioned to manage adverse shocks associated to volatility in international financial markets”. The analyst firm also estimates GDP growth of 4.2% for 2011. Banks operating in the country also echo this upbeat sentiment.
“HSBC’s outlook on the Mexican market is definitely positive,” says Mauricio Munoz, head of trade and supply chain at HSBC Mexico.
“Although the forecast for GDP growth has decreased, mainly because Mexico continues to be heavily dependent on the US economy which is now to some extent failing to recover, trade flows continue to grow at an average of almost 20% compared with 2010. Furthermore, Mexico is a major trade hub linking South and North America; it is a member of Nafta which makes it an ideal location for businesses who wish to develop trading routes into the US and Canada. Exports are increasing at a rate of 18.9% if we compare January to September versus the previous year.”
Question of security
In spite of this, attracting foreign businesses into Mexico has been no easy task, given the recent spike in violence along its border region. Ciudad Juarez, the country’s manufacturing hub for export products, has one of the highest murder rates in the world at about 130 killings for every 100,000 inhabitants, and across the country, mining companies have been forced to shuttle their ore via expensive air freight instead of risking hijackings along the open highways.
“Mexico is in a really unique position,” says Josh Miller, general manager of Control Risks Mexico. “We see the security situation getting incrementally worse every month and it doesn’t seem to be letting up, particularly in certain parts of the country. All in all, there’s been a marked deterioration in the security situation that is affecting companies.”
Nevertheless, it would appear that most investors are holding their nerve, with companies such as Honda even going
so far as to announce plans to expand in the country.
“Despite the risks, I can only think of one division of one company that elected to leave Mexico because of the security situation, so if anything we’re actually quite optimistic about Mexico’s future,” says Miller.
“The recovery from the recession has been faster than anticipated and people seem to be investing in Mexico. The general consensus is that companies acknowledge that the security situation is a serious problem but it’s not reached a level where it makes companies contemplate going elsewhere. Companies have already made the decision to invest in Mexico; they just want to know how to cope with the risk.”
One looming risk that many are keen to quantify is what will happen after the upcoming elections. Enrique Peña Nieto, Partido Revolucionario Institucional (PRI) member, is widely tipped to take the Mexican presidency in 2012, but so far his party has been reluctant to set out its policies on crime, perhaps because, according to prosecutors, some of its members in Michoacán state are involved with the cartels.
“A lot of the business community is essentially holding their breath to see what the policy of the next administration will be,” says Miller.
Whoever the new president is, he will face demands from the US, which has invested heavily in personnel, equipment and expertise due to worries about the growing reach of Mexico’s transnational gangs.
Despite the bloody headlines coming out of the country, Rafael Amiel, director of Latin American economics at IHS Global Insight is among the many that are bullish about Mexico’s prospects.
“The brightest spot in the Mexican economy is the external sector and external accounts,” he says. “Sovereign debt is not an issue. Mexico is loaded with foreign exchange reserves, the debt metrics for Mexico are even stronger than those for Brazil and the ratings are better, and what that translates to in the trade world is a lower cost of financing. Within the region, Mexican exporters by far get the greatest benefit of being in a country that has a very strong and very good debt profile.”
Far from being solely the US’ manufacturing base of popular imagination, Mexico has a diverse range of exporting sectors. Its burgeoning aerospace sector currently counts 238 companies with exports of roughly US$3.5bn a year, mainly to the US. Car exports, textiles and clothing and electronics are also very strong.
On the energy front, the country’s state-owned petroleum company Pemex is talking of putting as many as 20 blocks, including deepwater licences, into operators’ hands by the end of 2012, and is said to be planning on doubling its exploration and production budget from current figures of US$40bn a year, which will undoubtedly attract major oil and gas companies.
Furthermore, the huge cost advantage that Chinese manufacturers used to enjoy against their Mexican counterparts is now rapidly shrinking. A decade ago, Mexican wages were almost three times higher than China’s. Now they’re only 45% higher, and trending lower.
Another advantage Mexico has over China is “the protection of intellectual property, which is becoming more and more of an issue”, as Manuel Gonzales, general manager at Rabobank Mexico points out.
“It’s now Mexico’s turn to develop its high-priority exporting sectors, so China’s weakness can support it in its strength,” says Bancomex’s Barinagarrementeria.
China’s growing weaknesses aside, a real coup for Mexican exporters was the signing of a deal with the US on July 16 this year, which ends a 16-year violation of the Nafta agreement by allowing Mexican trucks to carry loads across the border. This deal is set to slash delivery costs of Mexican goods to the US by an estimated 15%.
However, placing too much emphasis on the US market is what got Mexico into trouble in the first place. If it is to insure itself against a further US slowdown,
Mexico urgently needs to address the diversity of its export base.
“After the signing of the Mexico-EU FTA, Mexico has the potential to increase its trade of a variety of products in many sectors, particularly in those regions of the European market not yet penetrated,” explains Carlos Avila, executive director at JP Morgan treasury services. “Mexican companies now have the opportunity to expand to the European Union’s new member countries. They should take this opportunity to establish themselves in Eastern European and Mediterranean countries.”
To help exporters do this, the IFC is currently approving a US$25mn trade finance line for Banco del Bajio – its biggest trade finance line for a domestic Mexican bank.
“They will use this trade line to diversify the export countries for their client base, by using the IFC guarantee to access new markets where the bank doesn’t yet have trade lines approved or is not comfortable yet with the risks; and for import financing, where IFC will increase the access to funding to Banbajio, whereby Banbajio will lend to Mexican importers at competitive interest rates and interesting tenors,” says Antonio Alves, principal officer, short term finance department, Latin America region at the IFC.
Certain non-traditional sectors and export destinations are already experiencing growth.
“We are seeing increasing pork exports to Japan, and now Mexico is exporting to Korea. With beef, Mexico has just opened up the Russian market and there is even some going to Angola. Mexican exports are also going to Hong Kong, which is a way to get into the Chinese market, and it has exported to Vietnam, so I think we are seeing a sizeable increase in different export markets for Mexican goods,” notes Ken Shwedel, head of food and agribusiness research and advisory at Rabobank Mexico.
As a strongly export-oriented economy, Mexico is, however, overly exposed to the current crisis in Europe and its contamination to the emerging markets.
“Overall everyone is cautious, not taking any aggressive or bold action because nobody knows what is going to happen in the next months. There are two components to be monitored carefully: oil prices, and the situation with Europe and Greece and its implications and contamination,” says Alves at the IFC.
Nonetheless, unless the gloomiest of economic and political scenarios come to pass, Mexico’s strong financial situation should put it in good stead for a bright future as an exporter and trading partner.