Saturday, March 23, 2013

The Mexican Aztec tiger is still missing its teeth - Brief Notes series

Mexico is back in the limelight, in a way that reminds many of a pre-'94 era when its then President Carlos Salinas said to his American counterpart in the impeccable English of a true technocrat - "We don't want help. We want business." This rhetoric would set the tone of a period in which the NAFTA became the center of discussions at cafes and restaurants, a concept that at times held an approval rating amongst the educated sector of the population so high that Ecuador's recently reelected President Rafael Correa would envy.

Rafael Correa, President of Ecuador

Fast forward to today, the country has found itself the beneficiary of macroeconomic dynamics in the developed world which have resulted in cash being poured throughout its geography in a way that has created problems of sustainability as well as principal-agent conflicts with leaders of local municipalities, prompting the rating agencies to have a field trip downgrading their debt several notches at a time. But that is fine as long as the 30,000 ft picture remains stable, if one is to look at it through the eyes of of the broader investor community.

Mexico grew just about 4% in 2012, more than countries like South Korea (2.2%), U.S. (2.2%) and the Eurozone's - 0.5%. But it also lagged Chile, China and southeast Asian countries like Thailand and Indonesia. Its 4.5% average annual growth of the last three years may seem like a solid indication of growth stability, until contrasted with the - 6.5% of 2009. So maybe Mexico is now in fashion because it seems to have broken a trend of lackluster growth during two back-to-back "opposition party" administrations, when it barely managed to inch an average of 1.9%, just about the annual population growth of the period. If we talk of the last thirty years, the average approaches zero and definitely falls behind its demographic growth trend. Can we talk about true progress when a country's economic growth hasn't been able to keep up with the expansion of its population?

Another constructive argument could be that the economic stability and relative policy consistency of the last 25 years is only now paying dividends. Well, there are important reforms pending (fiscal, labor, energy, education, etc.) and archaic public entity models that desperately need to be updated (the likes of PEMEX for oil and CFE for electricity). Still, the international community seems optimistic the current President can find a way to foster the necessary alliances and build consensus to push them through a belligerent Congress more focused on their political career than in compromising to achieve anything. Sounds familiar? A clear example, anyone who dares to talk about private capital infusions or qualified professional management for the national oil company will find ferocious opposition from all political factions. There are just too many sacred cows that remain untouchable, a fact counterintuitively exacerbated after the apprehension of the leader of the country's teacher's union Elba Ester Gordillo.

Former boss of the Teacher's Union

My take: I have seen this picture before, and unfortunately it does not end well. The stars align to support a brilliant economic future for the country (high oil prices, revival of U.S. manufacturing, a global environment favorable to EM economies, abundant natural resources and favorable demographic dynamics, geographical advantage over its main competitor to export to the U.S.). Yet, politicians and industrialists alike waste the opportunity because of petty self-interest. Smith's invisible hand will not help this time around, and may even get in the way. Unless government policy is strongly biased towards the improvement of the middle and lower economic class living conditions through a true educational reform that prepares the population to exploit the opportunity, we will see a an exacerbation of the income polarization trend that has produced the world's richest man. If conditions remain unchanged, we will witness a deepening of the national security problems that have resulted in the de-facto suspension of the government's ruling power in large parts of the territory. I would caution about the long-term growth prospects of this economy until sustainable far-reaching reform is achieved in this field, more than energy and health.

It is still too soon to believe Mexico is on its way to turn into the economic Aztec tiger (jaguar?) many expect, following the steps of its Asian counterparts. What remains true is this country has, once again, everything in its favor to do so.


- Mexico Municipal Debt debacle as highlighted in Moodys and S&P notes like "Moody's downgrades Acapulco to, ratings under review for possible downgrade". Moody's Investors Service. January 15, 2013.
- "Tigre Azteca" by Sergio Sarmiento. Reforma. Feb 18th, 2013
- "Mexico: Aztec Tiger – Mexico Institute in the News". Wilson Center for Independent Research, Open Dialogue and Actionable ideas. January 31, 2013. 
- "The rise of Mexico". The Economist. November 24th, 2012.