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Mexico: Effects of Global Recession and Future Prospects

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