In recent postings, I have commented on the difference between the growth prospects of developed and emerging market economies. I have also noted the remarkable recovery in Latin American stock markets relative to the rest of the world.
I have been writing a series of articles co-authored with my students at the Business School at the University of Palermo in Buenos Aires. So far, articles on Argentina, Brazil, Chile, Colombia, Peru and Venezuela have been posted. The articles assess the impact of the global recession on these countries and their future growth prospects.
A study on Mexico is published below.
Mexico: Effects of Global Recession and Future Prospects
By Elliott Morss
EXECUTIVE SUMMARY
The credit freeze had a significant impact in Mexico. The stock market fell 48%; that loss has recently been pared to 5%. The reduction in export demand resulting from the global recession has had a greater impact. Exports fell an estimated 25% in 2009, with investment down more than 10% and consumption off nearly 7%. Unemployment jumped from 4.3% in 2008 to 5.6% in 2009. 1010 looks better, with GDP growth of expected to increase by 3.0% after falling 7.1% in 2009.
IMPACT OF CREDIT FREEZE
The credit freeze has had a dramatic impact worldwide. As indicated in Table 1, the world lost $36 trillion in stock market losses directly following the credit freeze. Globally, markets have recovered cutting stock losses to $22 trillion. Latin American stock markets have recovered dramatically. And after being down almost 48% for a loss of $227 billion, the Mexican market is now only down a little more than 5%.
Table 1. – Global Stock Market Losses (in mil. US$)
Index | |||||||
Index | Index High | Index Low | Hi-Lo % Loss | Hi-Low $ Loss | Recent High | Hi-Now % Loss | Hi-Now $ Loss |
DJ Eurstoxx 50 | 4.543 | 1.810 | 60,20% | 7.210.000 | 2.763 | 39,20% | 4.700.000 |
Nikkei 225 (Japan) | 18.239 | 7.569 | 58,50% | 2.590.000 | 9.844 | 46,00% | 2.040.000 |
S&P 500 (US) | 1.558 | 683 | 56,20% | 10.350.000 | 1.059 | 32,00% | 5.900.000 |
S&P Asia 200 | 6.749 | 3.145 | 53,40% | 6.850.000 | 4.540 | 32,70% | 4.200.000 |
TSX (Canada) | 14.984 | 7.591 | 49,30% | 810.000 | 11.173 | 25,40% | 420.000 |
Argentina (Merval) | 2.339 | 829 | 64,56% | 21.985 | 2333 | 0,26% | 159 |
Brazil (Bovespar) | 73.516 | 29435 | 59,96% | 641.844 | 67413 | 8,30% | 133.079 |
Chile (IPSA) | 3.499 | 2.101 | 39,95% | 149.307 | 3465 | 0,97% | 2.416 |
Colombia (IGBC) | 11.439 | 6461 | 43,52% | 61.599 | 11693 | -2,22% | -2.422 |
Mexico (Mexbol) | 32.721 | 16.869 | 48,45% | 227.146 | 31017 | 5,21% | 22.945 |
Peru (IGBVL) | 23.635 | 6.716 | 71.58% | 67.774 | 15460 | 34.59% | 32.801 |
Venezuela (IBVC) | 62.013 | 34172 | 44,90% | 54111 | 12,74% | ||
Total 7 LA Countries | 1.125.851 | 188.077 | |||||
Total | 28.660.000 | 17.550.000 | |||||
Total Adjusted* | 36.000.000 | 22.050.000 |
IMPACT OF DECLINING GLOBAL DEMAND
As shown in Table 2, Mexico’s leading exports are electrical machinery, oil, vehicles and nuclear reactors. All have been adversely affected by the global recession.
Table 2. – Mexico Export Performance (in mil. US$)
2009 | 2008 | 2009 | ||||
Item | 2006 | 2007 | 2008 | (11 mos.) | (1st 9 mos.) | (1st 9 mos.) |
Total Exports | 249.9 | 271.9 | 291.3 | 206.8 | 228.0 | 162.5 |
Electrical Machinery | 61.7 | 70.3 | 75.2 | 55.2 | 57.8 | 43.8 |
Oil | 39.0 | 43.0 | 50.6 | 27.5 | 43.3 | 21.6 |
Vehicles | 39.5 | 41.9 | 42.8 | 29.8 | 32.2 | 22.1 |
Nuclear Reactors, Boilers, Machinery | 32.7 | 33.9 | 33.7 | 26.2 | 25.9 | 20.7 |
Overall, exports are down 29% (Table 3), with oil exports hardest hit.
Table 3. – Mexico: Change in Exports
2008 - | |||
2006 - | 2007 - | 2009 | |
Percent Change | 2007 | 2008 | (1st 9 mos.) |
Total Exports | 9% | 7% | -29% |
Oil | 10% | 18% | -50% |
Vehicles | 6% | 2% | -32% |
Electrical Machinery | 14% | 7% | -24% |
Nuclear Reactors, Boilers, Machinery | 4% | -1% | -20% |
Table 4 provides data on Mexico’s leading exports. Using 2008 data, these 4 export categories comprise 69% of Mexico’s total exports.
Table 4. – Mexico – Leading Exports
2009 | 2008 | 2009 | ||||
Export Composition | 2006 | 2007 | 2008 | (11 mos.) | (1st 9 mos.) | (1st 9 mos.) |
Electrical Machinery | 25% | 26% | 26% | 27% | 25% | 27% |
Fuels | 16% | 16% | 17% | 13% | 19% | 13% |
Vehicles | 16% | 15% | 15% | 14% | 14% | 14% |
Nuclear Reactors, Boilers, Machinery | 13% | 12% | 12% | 13% | 11% | 13% |
Mexico’s export performance depends primarily on US demand. As Table 5 indicates, more than 80% of Mexico’s exports go to the US.
Table 5. – Mexico – US Export Share
2009 | 2008 | 2009 | ||||
US Export Share | 2006 | 2007 | 2008 | (11 mos.) | (1st 9 mos.) | (1st 9 mos.) |
Non-Fuels | 85% | 83% | 80% | 80% | 80% | 80% |
Fuels | 81% | 80% | 82% | 84% | 81% | 84% |
According to the CIA, Mexico produces 3.186 million bbl of oil daily. It has proved reserves of 10,500 million bbl. At this rate of production, Mexico has only 9 years of oil production capacity left. Of course, with increased investment oil, reserves can be raised. But The Mexican situation is far different than Venezuela that has 99 million bbl of proved reserves.
THE DOMESTIC ECONOMY
Consumption fell sharply in 2009. According to the LatinFocus Consensus Forecast (http://www.latin-focus.com/), consumption was down 7.1%. Investment was down by 10.5%. Overall, GDP, which had been growing by more than 3% over the last half decade, fell by an estimated 7.1% in 2009. The unemployment rated increased from 4.3% in 2008 to 5.6% in 2009.
EXTERNAL SECTOR
Mexico has traditionally run both a trade and current account deficit. These have in part been covered by workers’ remittances which constituted approximately 2.6% of GDP in 2008. As Table 6 indicates, the trade and current account balances have been increasing over time. The global recession will probably cut workers’ remittances by more than 50%.
Table 6. – Mexico: Trade and Current Account Balances
Item | 2006 | 2007 | 2008 | 2009 |
Current Account Balance | -0.5 | -0.8 | -1.5 | -1.6 |
Trade Balance | -0.6 | -1.0 | -1.6 | -1.3 |
Source: LatinFocus.
GOVERNMENT POLICIES
According to the International Labor Organization, the Mexican Government has launched a stimulus package of $54 billion or 4.7% of GDP to counter the global recession. This package, coupled with deteriorating government revenue resulting from the recession, has prompted concern over the government deficit. LatinFocus projects that it will grow to more than 2% for both 2009 and 2010.
LOOKING AHEAD
The World Bank estimates World GDP will fall 2.9% in 2009 before recovering 2.0% in 2010. That means Global GDP will not get back to 2008 levels until 2011. Latin America overall will fall somewhat less in 2009 before increasing 2% in 2010.
Table 4. - World Bank Global GDP Growth Estimates
Region | 2007 | 2008 | 2009 | 2010 |
World | 3,8 | 1,9 | -2,9 | 2,0 |
High Income | 2,6 | 0,7 | -4,2 | 1,3 |
Developing Countries | 8,1 | 5,9 | 1,2 | 4,4 |
South Asia | 8,4 | 6,1 | 4,6 | 7,0 |
India | 9,0 | 6,1 | 5,1 | 8,0 |
East Asia and Pacific | 11,4 | 8,0 | 5,0 | 6,6 |
China | 13,0 | 9,0 | 6,5 | 7,5 |
Middle East and North Africa | 5,4 | 6,0 | 3,1 | 3,8 |
Sub-Saharan Africa | 6,2 | 4,8 | 1,0 | 3,7 |
Latin America and Caribbean | 5,8 | 4,2 | -2,2 | 2,0 |
Europe and Central Asia | 6,9 | 4,0 | -4,7 | 1,6 |
The World Bank estimates that Mexico’s GDP will fall by 5.8% in 2009 before growing by 1.7% in 2010.
Table 5. - World Bank Latin American GDP Growth Estimates
Country, Region | 1995-2005 | 2006 | 2007 | 2008 | 2009 | 2010 |
Brazil | 2,4 | 3,7 | 5,7 | 5,1 | -1,1 | 2,5 |
Mexico | 3,6 | 4,8 | 3,3 | 1,4 | -5,8 | 1,7 |
Argentina | 2,3 | 8,5 | 8,7 | 6,8 | -1,5 | 1,9 |
Venezuela | 1,6 | 10,3 | 8,4 | 4,8 | -2,2 | -1,4 |
Colombia | 0,7 | 6,8 | 7,5 | 2,5 | -0,7 | 1,8 |
Chile | 4,2 | 4,3 | 4,7 | 3,2 | -0,4 | 2,7 |
Peru | 3,3 | 7,6 | 9,0 | 9,8 | 3,0 | 4,3 |
LatinFocus (http://www.latin-focus.com/) collects projections from a wide variety of organizations. Its Consensus GDP Percent Change Forecast for Peru is –7.1% for 2009 and 3.0% for 2010.
Mexico’s external debt is 22% of its GDP; this is moderate by Latin American standards. The Sovereign Spread over US Treasuries is only 200bps, making second only to Chile as the lowest in Latin America.
Disclosure: no positions