On the heels of an important change in the political climate from this summer’s presidential election, Mexico appears poised to deliver another year of well-balanced economic strength. Gross domestic product (GDP) growth has been resilient, outpacing world GDP since 20101 and while inflation has crept above Banco de Mexico’s 3% (+/- 1%) target2, it has remained under control. Additionally, after a decade of losing ground versus the U.S. dollar, the Mexican peso now stands to gain from Mexico’s fiscal responsibility, a potential U.S. recovery during 2013 and the political change.
The most recent eight years defined a period of unfulfilled hopes due to a dearth of reform in Mexico. Over a decade ago, Vicente Fox led the National Action Party (PAN) to victory by breaking the nearly 70-year rule of the Institutional Revolution Party (PRI). For those unfamiliar with Mexican politics, the PRI became increasingly tied to corruption, patronage and repression during its long tenure, and Mexico voted for a change by electing Fox. Sadly, he did not deliver. Then in 2006, Felipe Calderón (also of PAN) attempted to champion reforms, but met several obstacles. The 2008 financial crisis derailed the U.S., Mexico’s main trading partner, and slowed domestic growth markedly. Violence escalated alongside the loss of jobs and led to the return of unskilled workers to the country. Constant PRI opposition to key reform initiatives didn’t help matters.
Announced plans are a good start, but follow through is needed
We fast forward to July 2012, when Mexicans again voted for change. PRI’s Enrique Peña Nieto was the victor, bringing back the old political machinery. However, we believe initial signs suggest the PRI is trying out a new image, leaning towards much-needed reforms. Peña Nieto announced a number of policies on his first day in office on December 1 that includes a plan to achieve zero fiscal deficit and reduce government operational spending in the 2013 budget. These are not necessarily lofty goals because Mexico isn’t a country known for profligate spending, but it could set the tone for further reform. Peña Nieto’s cabinet selections really caught my attention. He chose a favorable blend of technocrats and career politicians who could prove to be pro-reform. For example, the new Finance Secretary, Luis Videgaray, has a Ph.D. in economics from MIT and a wealth of private sector experience. He has already discussed implementing reform, and I believe his experience and his position may make him just the person to push forward fiscal reform that will drive change.
I will look for specifics of how the new government plans to achieve its goals to see if this truly is a new PRI that will drive Mexico’s economic growth. I believe we are looking at an opportunity for upside in the coming two to four years as the outlook for Mexico’s creditworthiness is improved from an already- strong position. Therefore, we continue to have an overweight position in Mexican sovereign bonds and the Mexican peso, and an overweight and growing exposure to Mexican corporate bonds in our portfolios.
- International Monetary Fund, World Economic Outlook, October 2012.
- Banco de Mexico, Quarterly Inflation Report, November 5, 2012. Inflation as described by Mexico’s Consumer Price Index was 4.77% as of September 30, 2012.
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