Mexico: Conquering its Challenges (Mobius)

by Mark Mobius, Vice-chairman, Franklin Templeton Investments

Mexico has a wonderful combination of a dynamic economy with an active cultural scene. Just like other markets around the world, Mexico’s stock market suffered a crash at the end of 2008 and the beginning of 2009, moving from the 2007 high of almost 32,473 points to an October 2008 low of 16,979 points, an enormous decline. Since then it has climbed steadily, more than doubling to reach 38,600 points again at the beginning of this year.[1]

The Mexican economy has mirrored the stock market. After a disastrous 6% contraction of the economy in 2009, Mexico grew by more than 5% last year and is expected to grow by 4% in 2011.[2] Mexico took its medicine early in the crisis with fiscal reform in 2009 which included a value-added tax and cuts in government spending. The public deficit is now only 2.5% of the GDP and is expected to decrease to 2% in 2011.[3] Public debt as a percent of GDP is 40%, which is considered reasonable when compared to other nations around the world.[4] More importantly, foreign reserves are building up and have risen from the mid-2009 level of US$80 billion to over US$120 billion today.[5]

As with other parts of the world, inflation is a worry but is currently about 4%, down from the 2008 high of 6.5%.[6] Interest rates are also down. Nevertheless, unemployment is up to over 5%, a significant rise from the 2006 lows of 3.5%.[7] As a result of its close economic ties to the U.S. economy and with most of its exports destined for that market, Mexico’s exports nosedived when the subprime crisis hit the U.S. economy. Since then, the country has seen rapid growth and recovery, and there are some concerns when the Mexican peso started strengthening against the US dollar. The strengthening of the peso makes food imports cheaper and helps to put some constraint on inflation. However, the processed food association has warned that rising commodity prices will force the producers to raise prices. The Secretary of the Economy commented that the strong domestic agricultural harvest in 2010 would be an ameliorating factor. The government clearly wanted to ensure that the prices of tortilla, Mexicans’ staple food, do not rise and has been hedging corn prices.

One of the bigger challenges for Mexico has been the increasingly negative headlines focused on its drug wars. Almost daily, we hear news coverage about the violence connected to the illegal drug trade and problems along the border between Mexico and the U.S. It is a very unfortunate situation that law enforcement officials on both sides of the border are working aggressively to address. While the negative publicity has not been good for tourism, one of Mexico’s most important industries which has seen visitors from the U.S. decline, it has not resulted in a wholesale abandonment of Mexico as a tourist destination. The beauty of Mexico, the culture and the beaches continue to draw visitors to Cancun, Los Cabos, Puerto Vallarta, Mexico City and other destinations bringing over US$12 billion in expenditures each year to Mexico.[8] I’m confident that Mexico will conquer its drug violence problem and emerge stronger going forward.