Mexico Behind the Numbers

Mexico's international balance of payments (b-o-p) in both the third quarter and the first nine months of 2012 was for the most part favorable, with a marked reduction in the current account defi cit, a strong upturn in the foreign portfolio investment column and a new boost for international reserves.

According to offi cial Banco de Mexico statistics, which are always subject to revision, perhaps the most noteworthy b-o-p gain was the favorable merchandise trade balance in the first nine months, even though this was in the red in the third quarter.

For purposes of this article, and space considerations, let's focus on three areas of the balance of payments report: the current account, international reserves holdings and foreign direct investment. 

CURRENT ACCOUNT

The current account defi cit through September had been sharply reduced, thanks to a good overall gain in merchandise exports, tourism inflow and remittances. For the nine month period, the defi cit was a very manageable $2.58 billion dollars. The comparison 2011 fi gure had been $6.67 billion. A big boost came from merchandise trade, where the b-o-p numbers came up positive by $2.12 billion. One year earlier, this same line item had been in the red by $733 million.

A key element in measuring the impact of the current account defi cit is its relation to Mexico's Gross Domestic Product (GDP). In the fi rst nine months of 2012, this ratio was just 0.3%, its second lowest reading in the period since 2000. And it compared favorably with the 0.8% of 2011.

A core part of the current account is merchandise trade. This item line showed a positive result of $2.12 billion dollars in the cumulative January-September period, although it was in defi cit (-$1.17 billion) in the third quarter. Continuing to be signifi cant in Mexico's merchandise trade were non-petroleum exports fueled by a 12.36% increase in automotive exports. That same category, double digit year-onyear growth level continued to be enjoyed by the automotive industry in both October and November. Minerals exports were also strong.

A less positive factor was the virtual stagnation of revenues from crude oil exports, due to lower world market prices and export volume.

The current account for the full year 2012 has been forecast with a defi cit of $6.37 billion dollars (vs. an offi cial $9.15 billion in 2011). That according to the November survey by Banco de Mexico of private sector economic analysts. That same survey pointed to an $11.1 billion defi cit this year. That would basically be a refl ection of anticipated at best anemic growth in the global and U.S. economies in 2013.

The same central bank survey anticipates a merchandise trade deficit of just $1.0 billion for the full year 2012 and then a deficit of $4.6 billion this year. For comparison purposes, the 2011 trade deficit was $1.47 billion dollars.

INTERNATIONAL RESERVES

During the third quarter, Mexico continued to accumulate gross international reserves. But the July-September net accrual was at its lowest level since the fi rst quarter of 2010.

The total -- $2.87 billion dollars – upped the nine months net reserves gain by $16.38 billion dollars. That was substantially below the $20.49 billion upturn in January-September of 2011. In the third quarter of that year, Banco de Mexico reserves swelled by $7.91 billion.

The reason was the general decline in crude oil export earnings, a very large percentage of which go into the central bank's reserves coffer. The bank referred to this growth downturn in its balance-ofpayments report, noting that in the third quarter gross crude oil export earnings declined 4.5%, to an average of $99.78 dollars per barrel for the three month period.

And the crude oil exports price (and volume) show no improvement since September. As of mid-December, the quoted export price for the crude oil export mix was just under $95 dollars/barrel. Since September as a direct result, there has been no appreciable variation in the reserves fi gure, as reported weekly by Banco de Mexico.

This dual problem of crude oil exports prices and volume could also impact on the run-up of Banco de Mexico reserves holdings in 2013. The Secretariat of the Treasury, in its mid-December presentation of Mexico's overall growth panorama for this year, forecast an average annual price of $84.90 dollars per barrel, vs. the $101.70 average recorded in the January-November 2012 period.

And that decline will not be compensated by any increase of note, if any increase at all, in exports volume.

For the year 2012, Mexico's gross international reserves probably will have risen by just under $20 billion dollars, whereas the prior year increase had been $28.62 billion. But that's still a healthy gain. The year-end 2012 reserves total then would be very close to $185 billion dollars.

In a reserves related development, the International Monetary Fund in late 2012 renewed its fl exible credit line with Mexico. Under terms of the accord, Mexico can count on an available IMF credit line of some $73 billion dollars, if required and with no strings attached. The fl exible credit line is open for a 2-year period. The fi rst such credit line for Mexico was subscribed in April 2009, and is measured in IMF Special Drawing Rights (SDRs).

FDI

Third quarter results for foreign direct investment (FDI) were frankly disappointing, at least at fi rst glance.

According to the Banco de Mexico balance-of-payments statement, FDI in the period was $3.58 billion dollars, this compared with $2.55 billion in the same period of 2011. Second quarter 2012 FDI had been $4.59 billion. For the first 9 months of 2012, FDI totalled $13.04 billion dollars, substantially below the prior-year fi gure of $15.82 billion.

New FDI in the third quarter was $1.53 billion, whereas inter-company accounts amounted to $1.92 billion. Particularly low was FDI via reinvestment of profi ts at a mere $121 million.

The above figures do not cover FDI in the pipeline. And exactly when that will show up in Banco de Mexico accounting is a question-mark.

Much depends on when that FDI actually is in Mexico and on the accounting books both of the central bank and the National Foreign Investment Registry (NFIR). As one example: the billion dollar plus Audi FDI in its new Puebla automotive assembly plant will come into Mexico over a period of several years. So it will show up only piecemeal in Banco de Mexico b-o-p accounting.

The manufacturing sector was the dominant recipient of FDI in the fi rst nine months of 2012, with 38.9% of the total pie. That fi gure includes the Maquiladora Industry, for which the precise FDI fi gure is never reported. But traditionally maquiladora investment was in the inter-company accounts category.

The trade sector, primarily retail outlets, came in second with a 14.9% share, just ahead of fi nancial services (14.8%). Tourism (hotel services) and mining again represented good chunks of FDI, 4.1% and 3.6% respectively.

Despite the drop in third quarter FDI results, the scenario seems to remain optimistic, for both the year-end 2012 total and that of 2013.

The monthly survey of economic analysts taken by Banco de Mexico seems to confi rm this optimism, existing notwithstanding an at best mediocre global economic outlook.

The November survey by Banco de Mexico tallied up $21.1 billion dollars in FDI in 2012 and a further $25.0 billion gain this year. If that forecast for the new year holds up, 2012 will be the best year for direct foreign investment since 2008.

Meanwhile, there continued to be a strong gain for foreign portfolio investment (FDI) in Mexico, primarily in government money market paper. This totaled a whopping $23.1 billion dollars. For the fi rst 9 months of 2012, FDI in both public and private sector paper was just under $57 billion, vs. $35.4 billion in the January- September 2011 period.

Overall total foreign investment (both FDI and FPI) in the 3rd quarter was more than enough to offset the current account defi cit, $23.10 billion vs. -$2.28 billion. This is usually the case. For the fi rst nine months of 2012, the same fi gures were $53.7 billion and -$2.58 billion respectively.

But measuring only FDI against the current account defi cit, the picture is different. This is not usually the case. The net direct investment account was positive by $2.28 billion in the July- September period, whereas the current account defi cit was greater by $1.4 billion. For January-September, net direct investment of -$3.30 billion (yes, a negative fi gure) certainly did not offset the $2.58 billion cumulative current account defi cit.

During the 9-month period, FDI abroad by Mexican entrepreneurs reached $16.37 billion dollars, $3.30 billion more than FDI in Mexico. However, taking just the 3rd quarter, FDI in Mexico was well ahead of Mexican DI abroad (outfl ow), $3.58 billion to $1.29 billion.