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11 Oct 2013

Mexico reforms mark new phase

Sergio Martin

by Sergio Martin

Chief Economist, Mexico, HSBC

Mexico reforms mark new phase

Mexico is the world’s 11th largest economy in terms of GDP

Mexico is in the midst of a transition towards a more modern and productive economy with higher potential economic growth in the medium and long term. Structural reforms that started with labour and government accounting have continued with key modernisations to education, telecoms and the financial system, followed by proposed bills on fiscal and energy reforms.

The Mexican economy could grow at rates that seemed unthinkable just a year ago

Many of the reforms require constitutional changes that are difficult to negotiate in political terms. But the current administration, under President Enrique Peña, is working within the ‘Pact for Mexico’, an agreement by the main political parties to create a more market-friendly economy that will attract investment and generate more employment.

The result is that the Mexican economy could grow at rates that seemed unthinkable just a year ago. GDP could rise by 5 per cent to 6 per cent a year compared with the current 3.5 per cent, putting Mexico on track to become a modern economy in the next few decades.

Mexico is the world’s 11th largest economy in terms of GDP, adjusted by purchasing-power parity – just below Italy and close to France, Brazil, the UK and Russia. But the United Nations Human Development Index, which measures poverty, literacy, education, life expectancy and other factors, ranks it at 61 out of 187 countries.

The services sector accounts for about two-thirds of GDP and the industrial sector is highly correlated to the US industrial cycle with about 78 per cent of Mexican exports going to the US. But although agriculture constitutes only 4 per cent of GDP, it accounts for 14 per cent of the workforce, implying low productivity.

Facts about Mexico

  • World’s largest exporter of flat-screens, fridges, silver, tomatoes, avocados and papayas
  • Exports, at USD800 billion, are about 60 per cent of GDP
  • 12 million Mexicans live in the US
  • 60 per cent of the population are aged under 35 – half are under 26
  • 46 per cent of Mexicans live in poverty – 10 per cent in extreme poverty
  • 23 million tourists a year visit Mexico

Over the past two decades – and particularly in the last year – Mexico has implemented market-friendly measures and economic reforms that have helped reduce its vulnerability to external factors, improved its macroeconomic structure, and reduced barriers to foreign investment.

Its central bank became independent in 1994 with a mandate to preserve the currency’s purchasing power. Since then, inflation has fallen and it should again stay within the 2 per cent to 4 per cent target range in 2013.

Mexico’s fiscal accounts are still highly dependent on oil revenues, but the government prudently operates hedges to give protection against sudden movements in oil prices. And the vulnerability of public debt to exchange-rate swings has been reduced by decreasing the relative importance of external borrowing to about a quarter of total debt, or about 10 per cent of GDP.

Macroeconomic stability, however, has not resulted in higher growth. Structural reforms that would promote faster economic growth than the historical average of 3 per cent a year – such as fiscal, labour and energy reforms – have historically faced political resistance. However, the Pact for Mexico is already yielding results.

This research was first published on 6 October 2013.

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