Economic Analysis of MexicoA Course Presentation by Group 8

Areeb Shaarique 13P128Shreyas Desai 13P138

Karthic Subramanian 13P147Raghavender Sridhar 13P157

Shivam Atri 13P167Tarun Gupta 13P177

Contents

• Mexican Timeline• Country Overview• Economic Growth• North America Free Trade Agreement• Macro-economic Indicators• Fiscal Policy• Challenges Faced Currently

1930’s to 1970’s 1980’s to 2000’s 2000’s to present

Economic

• A golden period of Mexican economy dubbed as the “Mexican

Miracle”A period of strong economic

growth

• The country experienced an economic boom during which

industries rapidly expanded their production

• International panorama changed : Oil prices plunged, interest rates

rose, Banking system nationalized along with several other industries

• Protectionist measures had made the industrial sector uncompetitive

with low productivity gains

• Government policies tried to make Mexico one of the most

economically open countries in the world

• Total trade with Canada and USA tripled and total imports and

exports quadrupled between 1991 and 2003

Political

•Turnaround happened due to a strong and stable government.

•Economic crisis in 1994 •Post 1994 NAFTA agreement and

lowering of trade barriers

• 2009 – World Financial Crisis•2013 – President Enrique Pena

Nieto vows to increase government spending

Mexican Timeline

Country Overview#13 based on nominal terms#11 based on PPPPositive but low rates of growth Reduced inflation and very low interest rates and has increased Per-

capita income considerablyExport oriented economy, more than 90% of Mexican trade is under

the Free Trade agreement of 1994 with over 40 countriesLabor force of 78 million (Mexicans were rated as the most

hardworking people in the world)• The new government has set an ambitious course of economic and

social reforms• Economic growth remains insufficient and more needs to be done to

improve well-being

North American Free Trade Agreement(1994)

• An agreement signed by Canada, Mexico, and the U.S, creating a trilateral trade block in North America

• The goal of NAFTA was to eliminate barriers to trade and investment between the U.S., Canada and Mexico

• The United States is, by far, Mexico’s leading partner in merchandise trade

• U.S. exports to Mexico increased rapidly since NAFTA, increasing from $41.6 billion in 1993 to $216.3 billion in 2012

• U.S. imports from Mexico increased from $39.9 billion in 1993 to $277.7 billion in 2012, an increase of 596%

• NAFTA helped Mexican manufacturers adapt to U.S. technological innovations more quickly

• Had positive impacts on the number and quality of jobs; reduced macroeconomic volatility, or wide variations in the GDP growth rate, in Mexico

• Almost 70% of U.S. imports from Mexico and 50% of U.S. exports to Mexico received duty-free treatment

• NAFTA has reinforced the high sensitivity of Mexican economic sectors to economic developments in the United States

NAFTA affect on Mexican Economy

Advantage

NAFTA affect on Mexican EconomyDisadvantages

• Maquiladora Workers Were Exploited• Rural Mexican farmers could not compete with low-cost corn and

other grains that were exported by subsidized U.S• NAFTA may have eliminated tariffs between the U.S., Canada and

Mexico, but it didn't do away with the numerous customs regulation that can stifle trade

• NAFTA has caused a higher amount of worker displacement in agriculture sector than in other economic sectors

• When NAFTA removed tariffs, corn and other grains were exported to Mexico below cost, Rural Mexican farmers could not compete

Macro-Economic Indicators

Capital Inflows and Interest rate

Mexico’s GDP at constant prices

Mexico GDP

GDP growth rate of Mexico

• In the third quarter of 2013, Mexican economy expanded at a faster-than-expected 1.3 percent over a year earlier

• Growth in manufacturing accelerated, partially offsetting a slowdown in agricultural production

• The economy recovered from a 0.55 percent contraction in the previous three-month period

• There was a surge in manufacturing and services

long-term Economic Growth

• The Economy growing at faster than potential rate since 2010

• Growth has been supported by expanding domestic demand and export market penetration

• Growth will slow in 2013 due to weak recovery in the U.S , destination for more than ¾ non oil exports

• New legislation and regulatory reform are needed to remove barriers to market entry, reduce corruption and make the civil justice system more effective

Consumer spending

Fiscal policy

• While fiscal policy continues to be prudent, public debt has increased during the recession

• Fiscal policy narrowed the deficits strengthening the credibility of Mexico's macroeconomic framework

• The government budget is overly dependent on oil• The government aims a balanced budget this year

which excludes oil investment in state oil company• The public sector borrowing requirement, a measure

of combined deficit of the federal government and its enterprise would still show a deficit of 2.4% of GDP

Government Spending in Mexico

Mexico Current account deficit

Challenges Faced Currently

Judicial system vulnerable to political interference

Property rights not strongly protected

Corruption undermines long-term institutional competitiveness• Ranked 104th on Corruption

Perceptions Index 2012 (CPI 2012)

Extensive reform measures undertaken but still marginal progress• Reforms undertaken in 1982 and

1994 to avert crisis but didn’t create dynamic economy

The “Sexenio Curse”

Year GDP

1994, last year of Carlos Salinas de Gortari4.7%

1995, first year of Ernesto Zedillo -5.8%

2000, last year of Ernesto Zedillo 5.3%

2001, first Year of Vicente Fox -0.6%

2006, last year of Vicente Fox 5.0%

2007, first year of Felipe Calderón 3.1%

2012, last year of Felipe Calderón 3.8%

2013, first year of Enrique Peña Nieto 1.2%*

• Sexenio refers to the six-year

presidential term

• Downturn in economic

activity with every change of

government administration

• Currency and balance of

payment crises in previous

years result of faulty domestic

policies

• Current slowdown a

combination of external and

domestic factors

Slowdown in 2013

Growth outlook slashed from 2.9% to 1.2% (IMF, 19th Nov)• Low government spending• Due to delays in budget

execution under new govt.

Drop in Construction output by 8.3% YoY• Industrial output fell 1.6% in

September from last year while forecasted was 0.4% (Bloomberg)

Slack demand for local exports• NAFTA helped Mexico turn into

exporter of computers, cars and fridges, contribute to almost 32% of GDP

Drop in remittances from Mexicans living abroad• $20 billion worth of remittances

bolster consumption

The Road Ahead

Government stabilizing and introducing more measures• Energy reform bill introduced to allow greater

public and private investment in the sector• Need labor and fiscal reforms to supplement

energy reforms

Growth projected to recover gradually to 3% in 2014• Manufacturing sector to recover due to

increased US demand• Public spending to gain momentum• Structural reforms implemented now would

bear fruit

References

• http://www.tradingeconomics.com/mexico/gdp-growth

• http://www.worldbank.org/en/country/mexico/overview

• http://www.keepeek.com/Digital-Asset-Management/oecd/economics/oecd-economic-surveys-mexico-2013_eco_surveys-mex-2013-en#page16

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