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

Source: http://www.banxico.org.mx/sitioingles/tipo/estadisticas/index.html.

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.

The content above was saved on the old Morss Global Finance website, just in case anyone was looking for it (with the help of archive.org):
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