March 2014 Monthly Article – Déjà Vu

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By Jerry Pacheco

The current economic situation in Mexico reminds me of what was going on in this country in the early 1990s. At that time, Mexico had fully committed to opening up its economy and opting for trade liberalization. It had a young president who was openly supportive of commerce and of foreign direct investment in his country. A wave of privatization, reversing the trends in the 1980s, was sweeping the country as it opened up its telecommunications and financial industries. The North American Free Trade Agreement was implemented in 1994 and Mexico was going full force ahead to create a modern economy. Perhaps more than anything, there was a spirit of change and excitement in the air.

Fast forward 20 years and this same feeling seems to be in the air, as the Mexican economy grows and change is happening daily. Since taking office at the end of 2012, Mexican President Enrique Pena Nieto has presided over historical changes, which include restructuring the educational system, creating fiscal reform and privatizing the nation’s petroleum industry. The drug violence has substantially subsided and as an added bonus, the world’s most notorious drug lord, Joaquin “El Chapo” Guzman, was recently captured by Mexican security officials after years on the lam.

From an economic standpoint, Mexico is now the darling of emerging markets. Many economists predict 3.8 percent GDP growth over the next couple of years – compared to predictions of 3 percent growth in the U.S. In 2013, Mexico had record exports to the U.S. ($280.4 billion), its largest export market. During this same year, Mexico imported $226.1 billion from the U.S. The U.S.-Mexico trade relationship is now more than $506 billion per year, an increase of 2.6 percent over 2012. The main sectors driving exports to the U.S. are automotive, automotive parts, and aerospace.

Major companies such as Cisco, Pepsico and Nestle have announced expansions of their Mexican operations that will total more than $7.3 billion during the next five years. In 2013, more than 50 Japanese companies, of which 41 are already operating, signed agreements to expand their operations in the State of Guanajuato, which will result in an investment of more than $1.79 billion and 12,580 new jobs. Pirelli Tires is investing $1 million per week, up to a total of $200 million, in its Guanajuato production plant to catch up with demand.

Due to the growth of industrial fields such as aerospace and automotive in states such as Queretaro, Vesta Corporation will invest $400 million throughout Mexico within the next five years. The company has been investing between $60 and $65 million every year in industrial buildings at the Aerospace and Queretaro Industrial Parks. Within the next two years, PEMEX will invest $600 million to upgrade and modernize its ocean fleet. It also has announced that it will contract the services of 42 ocean vessels for drilling and exploration purposes.

The country’s solid fiscal and monetary policies have resulted in Moodys Investors Service increasing Mexico’s debt rating to A3 from Baa1, making Mexico the second country in Latin America behind Chile to have this happen. Based on Mexico’s solid economic policies and indicators, firms such as Goldman Sachs and Nomura are predicting that the Mexican economy will enter the top 10 largest economies in the world by 2020.

Closer to the border, at 4.5 percent growth, the State of Chihuahua’s economy ranked number one of all Mexican border states, followed by Baja California (2.3 percent), Sonora (1.5 percent), Nuevo Leon (1.4 percent), Tamaulipas (1.0 percent), and Coahuila (0.6 percent). Chihuahua ranked number one of all Mexican states in terms of exports. This represents 13.05% ($41.7 billion) of the national total. It was followed by Baja California (10 percent), Coahuila (10 percent), Campeche (9 percent) and Nuevo Leon (8 percent). Having received foreign direct investment (FDI) of more than $1.6 billion, of which $1.3 billion was in manufacturing, Chihuahua ranked second among Mexican states. More than 49 percent of the state’s economy is based in some type of manufacturing, followed by services (22 percent) and commerce (16 percent).

Chihuahua’s construction sector grew 5.9 percent last year, and in the past eight months, Chihuahua has constructed 800 kilometers of new gas pipelines. On top of its rising production figures, the Mexican Petroleum Institute has announced that the Ojinaga region of Chihuahua not only has reserves of shale gas, but also shale oil and petroleum – this would be an extension of the reserves just north of the border in the Eagle Ford region.

Good things are happening in our neighbor to the south. A strong Mexican economy not only creates jobs for Mexicans at home, but makes Mexico a stronger trading partner for the U.S., thus creating American jobs.