mexico a bric in north america 2007

Mexico: A BRIC in North America

January 2007

NAFTAFUND

NAFTAFUND

1

I. Is Mexico a North American Economy?

II. Is Mexico a BRIC?

III. Challenges

i. Short Term

ii. Long Term

IV. Recommendations to liberate growth potential

IndexIndex

I. Is Mexico a North American Economy?

3Source: INEGI, Federal Reserve Board.

Mexican economic cycles are strongly linked to those of the US.

Economic Cycle

Is Mexico a North American Economy?Is Mexico a North American Economy?

Chow’s test shows significative evidence (F = 6.88) of a structural change in the economiccycles correlation as a result of NAFTA implementation.

-15%

-10%

-5%

0%

5%

10%

15%

1987

/01

1987

/04

1988

/03

1989

/02

1990

/01

1990

/04

1991

/03

1992

/02

1993

/01

1993

/04

1994

/03

1995

/02

1996

/01

1996

/04

1997

/03

1998

/02

1999

/01

1999

/04

2000

/03

2001

/02

2002

/01

2002

/04

2003

/03

2004

/02

Producción Industrial EUA

PIB Manufacturero México

TLCAN

Corr: -0.07 Corr: 0.67

NAFTA

US Industrial Production

Mexican manufacturing DGP

Mexican manufacturing GDP growth rate and USA industrial production

4

Exchange volatility has converged toward levels of the majorcurrencies. Moreover, the new floating exchange rate policy hasallowed to adequately absorb external economic shocks.

Source: www.oanda.com.

Exchange rate volatility

/ Euro


0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

Ene/

94

Ene/

95

Ene/

96

Ene/

97

Ene/

98

Ene/

99

Ene/

00

Ene/

01

Ene/

02

Ene/

03

Ene/

04

Ene/

05

Ene/

06

Canadian dollarGerman markJapanese yenMexican peso

5

Inflation has converged towards comparable levels between USAand Canada.

Source: INEGI, Federal Reserve System & Bank of Canada.

Inflation


-5%0%5%

10%15%20%25%30%35%40%45%50%55%

Ene/

94A

go/9

4M

ar/9

5O

ct/9

5M

ay/9

6D

ic/9

6Ju

l/97

Feb/

98Se

p/98

Abr

/99

Nov

/99

Jun/

00En

e/01

Ago

/01

Mar

/02

Oct

/02

May

/03

Dic

/03

Jul/0

4Fe

b/05

Sep/

05

CanadaMexicoU.S.

6

The short term interest rates have reached historic lows and areconverging toward US and Canadian levels.

Source: INEGI, Federal Reserve System & Bank of Canada.1 month rates

Short term interest rates


0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Ene/

93

Oct

/93

Jul/9

4

Abr

/95

Ene/

96

Oct

/96

Jul/9

7

Abr

/98

Ene/

99

Oct

/99

Jul/0

0

Abr

/01

Ene/

02

Oct

/02

Jul/0

3

Abr

/04

Ene/

05

Oct

/05

CanadaU.S.Mexico

7

Moreover, the financial markets have deepened, as is evidenced by theevolution of the yield curve.

Source: Banco de México

Yield Curve


0%

10%

20%

30%

40%

50%

60%

70%

80%

90% Mar-95

Jan-95

May-00

Apr-03

3m 1yr 3yr 5yr 10yr

Jan-00

20yr

May-04

30yr

Feb-07

II. Is Mexico a BRIC?

Mexico is a North American Economy …

9Source: ALTA Growth Capital with data from the World Bank.

Large Economies, 2004(data in billions of USD)

Is Mexico a BRIC?Is Mexico a BRIC?

China ($1,932)

India ($691)

Mexico ($677)

Brazil ($604)

Russia ($581)

Turkey ($303)

Indonesia ($258)

Saudi Arabia ($251)

Poland ($242)

South Africa ($213)

Iran ($163)

Thailand ($162)

Argentina ($153)

Malaysia ($118)

Venezuela ($110)

Czech Republic ($107)

Hungry ($101)

Colombia ($98)

Pakistan ($96)

Chile ($94)

Algeria ($85)

Filipinas ($85)

Egypt ($79)

Is understood by Large Economies, those whose GDP are above 75 billions of USD in 2004.

10Source: ALTA Growth Capital with data from the World Bank.


Population over 50 million, 2004

Population(million)

GDP (billion US$)

GDP per capita

China 1,296 $1,932 $1,491India 1,079 $691 $640Indonesia 217 $258 $1,189Brazil 183 $604 $3,301Pakistan 152 $96 $632Russia 143 $581 $4,063Mexico 103 $677 $6,573Philippines 81 $85 $1,049Egypt 72 $79 $1,097Turkey 71 $303 $4,268Iran 67 $163 $2,433Thailand 63 $162 $2,571South Afr. 45 $213 $4,733Colombia 44 $98 $2,227Argentina 38 $153 $4,026Poland 38 $242 $6,368Algeria 32 $85 $2,656Venezuela 26 $110 $4,231Malaysia 24 $118 $4,917Saudi Ar. 23 $251 $10,913Chile 16 $94 $5,875Czech Reo. 10 $107 $10,700Hungary 10 $101 $10,100

11


Goldman Sachs Growth Environment Score*China (5.0)

Thailand (4.7)

Mexico (4.6)Russia (4.2)

Iran (4.1)

Egypt (3.9)

Brazil (3.8)

Philippines (3.8)

India (3.7)

Turkey (3.5)

Indonesia (3.4)

Pakistan (3.2)

*Variables include inflation, government deficit, external debt, investment rates, openness of economy, penetration of phones, penetration of PC’s, penetration of Internet, average years of secondary education, life expectancy, political stability, rule of law, and corruption; mostly using 2002 and 2003 data.Source: ALTA Growth Capital with data from the World Bank.

12


Comparative indicatorsCriteria Emerging markets

Brazil Mexico India China RussiaMarket Size

Population (millions) 178.7 103.8 1,079.7 1,296.5 142.8 Surface Area (sq Km million) 8.5 2.0 3.3 9.6 17.1

TechnologyHigh-Tech Exports (% of manufactured exports) 11.6 21.2 4.9 29.8 9.1 Fixed line & Cell phone subs (per 1,000 people) 587.2 544.6 84.5 499.4 508.3*

Internet Users (per 1,000 people) 119.6 135.2 32.4 72.5 111.2 Economic Indicators

GDP (US$ billion) 604.0 676.5 688.7 1,653.8 581.4 GNI (US& billion) 551.6 704.9 672.8 1,672.5 488.5

Inflation (annual %) 8.2 6.1 5.3 6.9 18.1 Exports (fob US$ million) 81,466.0 189,159.0 76,345.0 593,369.0 183,452.0 Imports (fob US$ million) 62,809.0 197,247.0 99,836.0 561,423.0 100,193.0 Unemployment Rate (%) 8.3 2.8 8.8 N/A 7.9

International Reserves -2005 E (US$ billion) 27.8 68.7 N/A N/A N/A Entrepreneurship

Time required to start a business (days) 152.0 58.0 89.0 48.0 36.0 Trade Barriers Hgh Low Med-Low High Med-High

Difficulty to transfer cash to the US Hgh Low Medium High Med-High Degree of Gov intervention in economy Hgh Medium Medium High Med-High

Political Stability Index (US=100) 60.0 80.0 70.0 N/A 50.0 Foreign Policy/Relations w/ US 60.0 80.0 80.0 60.0 50.0 Political Regime Democratic Democratic Democratic Socialist/Comm Democratic Human Rights & Social Factors

Poverty (% of Pop below poverty line) 22.0 18.0 29.0 5.0 21.0 Literacy Rate (% of pop age 15+) 88.6 91.0 61.0 90.9 99.4

Infant Mortality (per 1,000 live births) 33.0 23.0 65.0 30.0 16.0 Trade Agreements Mercosur NAFTA N/A N/A N/A Nuclear Threat Low Low Low Hgh Low

*As of 2003. Data for 2004 not available.Source: ALTA Growth Capital with data from the World Trade Bank, Amnesty International, Latin Trade Magazine, IDC, and Core Strategies.

13


Convergence

*Excludes Korea.

Γ Goldman Sachs Overall Convergence Index as reported in How Solid are the BRICs, Global Economics Paper 134, GS, Dec. 2005

Δ The number in the table indicates the place in which each country ranks in the individual components of the General Convergence Index among the BRICs and Next Eleven, excluding Korea. Highlighted in red are scores below the mean.

After China, Mexico is the most likely among the developingeconomies to converge to developed country income levels.*

GES Index Mexico Brazil Russia India ChinaMacroeconomic Stability

Inflation 7 12 10 5 1Government Deficit 2 11 1 12 7External Debt 4 10 8 3 2

Macroeconomic ConditionsInvestment Rate 7 12 9 6 1Openness of economy 6 9 5 12 2

Technological CapabilitiesPenetration of PCs 2 4 1 11 7Phones 6 3 2 9 5Internet 1 3 6 11 5

Human CapitalEducation 3 13 1 12 6Life Expectancy 1 7 10 12 2

Political ConditionsPolitical Stability 4 3 9 7 2Rule of Law 5 4 9 3 6Corruption 4 1 9 5 6

General Index 2 7 4 9 1

Γ Δ

III. Challenges: Short Term

Mexico is a BRIC …

15

Inflationary Bubble

Challenges: Short TermChallenges: Short Term

Source: Banco de México & CEESP.

The inflationary bubble forming in these first weeks of 2007 maymodify the perception of the economic evolution in the short term.

Inflación

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

5.5%

6.0%

1Q E

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2Q M

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1Q J

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2Q A

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1Q N

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2Q E

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004

1Q A

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004

2Q J

un 2

004

1Q S

ep 2

004

2Q N

ov 2

004

1Q F

eb 2

005

2Q A

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005

1Q J

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005

2Q S

ep 2

005

1Q D

ic 2

005

2Q F

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006

1Q M

ay 2

006

2Q J

ul 2

006

1Q O

ct 2

006

2Q D

ic 2

006

?

Inflation

16

Source: Survey about the Expectative from the private sector economic specialists: December 2006, Banco de México.

Economic Expectations 2007Indicator Expectation ‘07

General Inflation 3.50%Underlying Inflation 3.30%Cetes rate (28 days) 6.86%Exchange rate at the end of the year (pesos for USD) 11.23

Mexican real GDP variation 3.49%Real variation in private sector consumption 4.00%Real variation in private sector investment 5.80%Real variation in public sector consumption 2.10%Real variation in public sector investment 4.80%US real GDP variation 2.54%Economic balance of the public sector Deficit de 0.07%Commercial deficit (millions of USD) 10,148Current account deficit (millions of USD) 8,645

Non-oil exports variation 8.49%

Oil exports variation -4.24%Imports variation 8.85%Average price level for Mexican crude oil (USD per barrel) 48.58

Foreign direct investment (millions of USD) 15,999


17

Public Finance

Source: Banamex.

40.0

42.545.0

47.5

50.0

52.555.0

57.5

60.062.5

65.0

03/A

br/0

618

/Abr

/06

03/M

ay/0

618

/May

/06

02/J

un/0

617

/Jun

/06

02/J

ul/0

617

/Jul

/06

01/A

go/0

616

/Ago

/06

31/A

go/0

615

/Sep

/06

30/S

ep/0

615

/Oct

/06

30/O

ct/0

614

/Nov

/06

29/N

ov/0

614

/Dic

/06

29/D

ic/0

613

/Ene

/07

USD

/Bar

ril


The price of Mexican crude oil has experimented in the last few monthssignificant and consistent reductions. Moreover, in the absence of newexploration, the oil reserves will continue to decrease at increasing rates.

Daily evolution of the price of Mexican crude oil

18Source: Ley Federal de Presupuesto y Responsabilidad Hacendaria.

Public Finance


“In case of a reduction of the crude oil revenues associated with a decreasein the weighted average price of the barrel (…) or a movement in the peso-US dollar exchange rate, below the threshold estimated in the RevenuesLaw, … the (SHCP –Treasury Secretariat) will dictate the terms tocompensate such decreases with resources from the Fund forStabilization of Crude Oil Revenues”.

In case of reaching the fund’s resources limit without compensating the fullrevenues decrease, budget adjustments will be applied in the following order:

1. Communication and publicity expenses2. Administrative expenses not directly linked with service to the general

population3. Expenses in personal services, with priority to any expenditure related to

extraordinary issues4. Budget savings and adjustments which are determined by all

dependencies and entities in their authorized budget schedules

Oil Stabilization Fund

III. Challenges: Long Term

20

Degree of Openness

The degree of openness of the Mexican economy hasdramatically increased. But it begins a perception of stagnation.

Source: Banco de México.

Openness

X+MPIB

0%

10%

20%

30%

40%

50%

60%

70%

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

Closed GATT NAFTA

21.70%30.43

53.32%

Cerrado GATT TLCAN

X+MPIB

0%

10%

20%

30%

40%

50%

60%

70%

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

Closed GATT NAFTA

21.70%30.43

53.32%

Cerrado GATT TLCAN

?

Challenges: Long TermChallenges: Long Term

Closed NAFTA

21

Since the signing of NAFTA, Mexican non-oil exports have shownsignificant growth; however, they also show signs of stagnation.

Fuente: Banco de México.

Trade

7.6

181.8

44.2

0

25

50

75

100

125

150

175

200

225

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

Mile

s de

mill

ones

de

USD

TLCANNAFTA

Evolution of Mexican non-oil exports


22

Foreign Direct Investment

Foreign direct investment has also had a dramatic increase as a result ofNAFTA. Stagnation is again noticeable.

Source: Ministry of Economy

2001 includes Citigroup’s acquisition of Banamex ($12.5 billions of dollars).

Investment

1,2993,468

15,489

0

5,000

10,000

15,000

20,000

25,000

30,000

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

Mill

ones

de

dóla

res

Cerrado GATT GATT y TLCAN

1,2993,468

15,489

0

5,000

10,000

15,000

20,000

25,000

30,000

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

Mill

ones

de

dóla

res

Cerrado GATT GATT y TLCAN


Closed GATT & NAFTA

IV. Recommendations

24

§ Legal and institutional framework needs to be strengthened§ Macroeconomic stability needs to be reenforced§ Laborü Labor reform needs to be encactedü Migration agreement with the US needs to be reached

§ Competitionü Private monopolies need to be broken upü Public monopolies –especially Electricity and Oil– need to be

privatized§ Energy reformü Public monopolies –especially Electricity and Oil– need to be

privatizedü Private sector investment in alternative enegies needs to be allowed

§ Infrastructure and logistcs needs to improve with public and private investment

A BRIC in North America

RecommendationsRecommendations

mexico a bric in north america 2007

Economy & Finance