Mexico's macro story

Eric Bushell's picture

In February, my family took a trip to Mexico. In order to refresh myself on Mexico's macro story, I decided to go down a bit earlier. It seemed like a good time to check things out. President Nieto had been in office for a year now and country risk analysts have been discussing his broad reform agenda, known as the Pact for Mexico.

During my time there, I was able to meet with a number of people including individuals from Scotiabank Mexico, an energy-focused law firm, Nestle, Mexico's central bank and the Ministry of Finance. While the economy has been soft in 2013 and recent tax increases have weighed on consumer confidence and spending in Mexico, the longer-term story is in the midst of turning from good to great.

In 2012, a rare political alignment between the three leading parties opened a window for dramatic reform. A comprehensive 95 point plan was agreed upon and is being rapidly legislated. The plan is aimed at raising the country's growth potential after a period of modest 2-3% growth. Vested interests on both sides of the political spectrum that have obstructed progress for decades are being tackled. Conceptually, Mexico is embracing competition, efficiency, trade and foreign investment. Courageous changes including opening the energy sector to foreigners have been achieved – the textbooks will have to be rewritten!

In 1994, the U.S. Fed’s exit from low rates on top of domestic policy errors triggered chaos in Mexico, much the way it has in emerging markets since last summer. The 1994 economic crisis in Mexico, widely known as the Tequila crisis, with its collapse of the peso and related banking system, resulted in a U.S. bailout and many banks being bought up by foreigners.

From that point forward, one can argue that Mexico has conducted the most responsible fiscal, monetary and bank regulatory policy of any country – and this also includes Canada. The economic payoff of this discipline has yet to materialize. The domestic (peso) interest rate structure has gradually declined and credit rating upgrades have begun. Low rates in conjunction with new financial reform to deepen collateralized lending should accelerate credit growth for consumers and small business.

As we have warned for several years, Mexico's manufacturing productivity and cost structure has threatening the industrial base in Central Canada. Auto and aerospace foreign investment is booming in Mexico. As China loses its competitive edge, more manufacturers will locate North American capacity in Mexico which will reinforce logistical infrastructure to serve the continent. Barring an external shock, the Mexican economy will thrive. Canada would be wise to engage in this opportunity. We plan to.



Submitted by Dan Noonan on

Does that mean you have taken a meaningful position in Mexico?

Thanks and keep up the good work.

Eric Bushell's picture
Submitted by Eric Bushell on

We own a variety of consumer, banking, industrial, and infrastructure positions in Mexico. I am pushing the team to travel back to Mexico this year to explore other opportunities – including property, railways, auto, and utilities. The energy opportunity is largely for U.S. oil services companies, across the Gulf of Mexico in Houston, and it won't materialize until 2015 and beyond. As it happens, many large listed companies are the very incumbents whose oligopolies are being targeted by the reforms – leaving them under some pressure.

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