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FIELD TRIP: The bet on Mexico


Mexico city, 08 May 2013

Despite a triple shock, ‘el narcotrafico’, Chinese competition and the financial crisis of 2008-09, the Mexican economy is holding well by North American standards: a decent growth level of 4.0 % in 2012. Mexico is becoming a key piece of the USA economic strategy, as was beset by the visit of Obama last week. 

Four things have convinced the Americans to put some serious chips on Mexico:

  1. Ever since the Peso crisis of 1994, the management of the economy has been robust, steady and a priority for all administrations.  Such a performance for nearly 20 years is just the stuff that convinces foreign investors to invest chips in the country.
  2. Foreign investments keep coming in as well.  Even the Japanese have staked $6 billion on Mexico in the last two years only.    The gap between hourly wages has considerably narrowed with a giant direct competitor: $1.63 in China and $2.10 in Mexico.  Mexico has shown resilience towards the China challenge.  Perhaps as a sign of time, Ingersoll Rand recently closed a plant in China and is relocating it in Mexico.
  3. Mexico is regaining weight as an export base for the North American market despite the fact It is still marginally losing ground to the Chinese and South Koreans in the USA market. The Mexican peso is one of the few currencies that has remained undervalued in real terms since the financial crisis of 2008-09.  
  4. The middle class is also growing.  The president of Procter Gamble of Mexico is confident that a Mexican baby boom is just around the corner and will drive consumption for the next 15 years.  The new district of Loma de Santa Fe is a testimony to the modern face of Mexico City. The architecture and look of the offices and shopping centers are on a par with the best in the world.

The president elect, Enrique Pena Neto, will need all the economic help he can get for a successful ‘sexenio’.  Mexico might not get a full seat at the free trade deal between the USA and the European Union (and as a matter of fact not even Canada), but a renewed Nafta deal and a seat at the TransPacific negociation table are productive steps for Mexico.

The PRI administration was off to a good start with a multi-party pact proposal affecting the financial, energy and education sectors. The seriousness of the intent has impressed observers.  Contrary to his predecessor, Pena will hold the advantage of a deep pool of expertise and experience in the PRI benches, to contend with the vagaries of the Mexican congress.  

The real challenges will come at the level of states, as is often the case in Mexico.  Wide disparity in economic and social terms will ensure that governance issues will be huge.  What can possibly drive politicians to hold state governorship in a landscape ruled by drug lords in the North, and by ‘caciques’ in the South?  Since the election of Pena, the level of violence has only stabilized and not abated, as the dead victims of the drug trade amount to about 3000 in Mexico.  There is simply less media exposure to it, for the time being. 

What is now really a major concern for the Americans is that the drug clans have moved their ground operations into Texas. This breach into US territory means that the messy social cost of restraining drug dealers is not any more confined to Mexico only. Texas Rangers will face new challenges on corruption, violence, drug consumption on their own ground. It is now an American problem as well. 

President Pena will be tested at the state level, and on his ability to handle regional crises fed by corruption and social tensions.  It is best if he can collect his economic chips early enough through a renewed Nafta treaty and hope to pull off some political reforms with congress.        

Un sexenio agitado, por seguro.

André Du Sault, MBA (LBS), MPA (Harvard)


Posted in CFO & treasury, Country visits, Governance, Management ideas, Strategy & globalisation, World economy.

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