Mexico’s Economic Prospects for 2012

Mexico’s Economic Prospects for 2012

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Despite the effervescence of the Presidential election campaign and multiple international growth uncertainties, Mexico should be able to weather the economic, financial and political storms of 2012. The most recent qualified forecasts for Mexico's economic growth as measured by real Gross Domestic Product (GDP) expect a consensus 3.35% figure.

That's not buoyant. But it probably has to be labeled as "adequate" considering the bevy of less-than-favorable global problems of 2011 and expected again this year. Mexico's domestic growth obstacles, most of which have become endemic, will persist unchanged, but not to any recessionary point.

As for Mexico on the world stage, the latest consensus forecasts place it squarely "in the middle" vs. growth. For Mexico, this consensus sees real growth at 3.35% (the range of forecasts is 2.8% to 4.1%).

Banco de Mexico expects global economic growth averaging 3.4% this year, whereas the most recent forecast (January) by the International Monetary Fund is 3.3%, down from an earlier IMF forecast of 4%.

The most optimistic real growth forecast of 4.1% comes from the Mexico City-based Private Sector Economic Studies Center (CEESP), normally "middle of the road" in its projections. The CEESP is the economic forecasting arm of the Businessmen's Coordinating Council (CEE).

Given that this is the last year of an Administration, usually a strong growth period, many pundits feel the 3.35% figure is disappointing. There is considerable veracity in that observation. But looking at how the global cards are stacked, now and for the near term, 3.35% has to be considered as "adequate".

This Administration since its beginnings has been unable to push through the series of structural reforms that could have been welcome additional growth detonators. Congressional blockage of these proposed reforms will again be with us this year.


Worth taking into account are the January comments by the governor of Banco de Mexico. Dr. Agustin Carstens, recently Banker" magazine, pointed what appears to be a realistic picture of Mexico's economic growth prospects.

Carstens said Mexico will not enjoy a favorable global economic climate "for at least the next 5 years". Europe and the U.S. are not going to have any accelerated economic growth". Mexico therefore should not depend heavily on external factors (such as exports and FDI) for nearterm growth.

Given the above plus a myriad of domestic factors, Mexico's growth this year will not be what's needed (6%) but will be at or above the world average (3.3%, according to the IMF's January forecast), Carstens emphasized.

The Banco de Mexico governor, whose tenure will not be affected by this year's Presidential election outcome, stated –again– that Mexico must implement much needed and long overdue structural reforms. Carstens' term as central bank governor runs through July 2015.

And what about the peso? Banco de Mexico in recent months has put into effect numerous measures to "shield" the peso against any strong external shocks. The peso "depreciated" 13% over the course of last year, closing 2011 at 13.97 pesos and with a forecast that the average exchange rate this year would be close to 13.70 pesos to US$1.

But January 2012 saw an unexpected but significant peso strengthening, combined with a new increase in international monetary reserves. During the month, the peso appreciated 6.7%. By early February, the peso exchange rate was 12.68 to the dollar (which in turn gained strength against the weakened Euro).

Reserves meanwhile rose from $142.48 billion dollars (end-December) to a record high $148.13 billion by early February. For 2012, daily open market rates will continue to fluctuate, but an average annual exchange rate of under 13.70 to the dollar seems achievable.


An area to watch is foreign direct investment (FDI). Current expectations are that the 2012 level will show a good rebound from last year's relatively disappointing figures. This could be particularly true if the U.S. economy performs at better than the 2% growth level, and particularly in the manufacturing sector.

Actually, quite a bit of 2012 FDI has already been earmarked, making it more likely that this will be a better year for foreign investment.

Previously programmed for the year: new investments in the automotive assembly, electronics, information technology, mining and aerospace industries, and also in retail trade. For example, work will start on the new auto plants of Honda, Nissan and Mazda, plants scheduled to become operating in 2013.

Nissan's new plant in Aguascalientes (confirmed in January) calls for an investment of US$2 billion. And the project surely will call for collateral investment by suppliers, many of them with FDI.

Official, full-year 2011 statistics for FDI announced (Banco de Mexico, Secretariat of the Economy) that it declined by around 2% to some $19.4 billion dollars from $19.72 billion in 2010. That trend should be reversed this year. Two-thirds of 2011 FDI came from the U.S. and 44% from manufacturing.


A sore spot in Mexico's economic outlook for this year is the agriculture/ livestock sector. Over the past few years, and especially in 2011, this sector has been buffeted severely by drought, particularly in northern and north-central Mexico. In a number of affected states, drought conditions were the worst in the last 70 years.

Crop and livestock losses have been extensive. Chances for a rebound of any kind in 2012 appear slim, if the latest meteorological expectations prove correct. In 2011, the apparent corn crop was only 20.0 million metric tons (MT), off 2.3 million from 2010. Total production of 10 basic grains and oilseeds was down 4.8 million to 31.0 million MT.

In addition to the implied hardships for the sector, a continuation of last year's drought conditions will mean an increased need for imports of agricultural/livestock products – particularly basic foodstuffs. But both the U.S. and Argentina, major producers and exporters of basics such as corn, beans and soybeans, have also suffered extensive droughts of late. This is likely to impact on their exports and export prices.

While the agriculture sector represents only a small share of Mexico's imports in dollar terms, there could be a substantial uptick this year in both volume and dollar value of imports of basic grains and legumes. The U.N. Food and Agricultural Organization (FAO) has already noted that world market prices for grains rose by 35% in 2011.

Another sector in question is petroleum. Mexico's crude oil production declined last year by nearly 1%. There also were declines in production of natural gas and refinery products, resulting in a sharp rise in imports (dollar value) of both natural gas and refinery products such as gasoline and petrochemical feed-stocks (+41.4%).

This year, PEMEX, the Mexican government controlled oil monopoly, is expected to boost daily crude output to 2.6 million barrels a day (annual daily average) vs. a daily average of 2.56 million in December and leave unchanged its level of exports (54% of production), according to its director general.

Not expected however is any change in refinery or natural gas output, meaning that those vital petroleum industry subsectors will require very substantial imports once again. And those refineries in operation still are not likely to be producing at capacity. Unfortunately for PEMEX (and for Mexico), its production and productivity will again not be helped by deeply-entrenched, union-dominated featherbedding and make-work practices.

It will be particularly hard to effectively combat them in a Presidential election year. In that regard, the PEMEX union this year holds elections for the powerful economic and political post of secretary general. That looms as the second most important election of the year, topped only by the vote for the Presidency.

As mentioned above, PEMEX production of crude oil dropped again in 2011 (for the seventh year in a row), averaging 2.55 million barrels/day. Back in 2004, the record output year, PEMEX crude production averaged 3.38 million b/d.

What is seen as likely by many sector analysts is a decline in oil export prices during 2012, a decline for which Mexico could not offset by increasing its daily export platform. The IMF for example expects oil prices (spot market) to drop by close to 5% over the course of this year. That trend may already be visible. Between last November and early February, the export price for the "Mexico Mix" went from $109 dollars/ barrel to $105 d/b.

For the full year 2012, forecasts look for an average oil export price of $94.90 dollars/barrel, whereas in 2011 it was $101.08, up $28.75 d/b average from one year earlier.


And what about that economy to which Mexico's is so inextricably linked? Over the past few months, the U.S. has been doing a tad better than expected. Manufacturing, new durable goods orders and export indices are higher and open unemployment is down a bit. The most recent forecasts are pointing to real GDP growth of about 2.3% in 2012, up from the apparent 1.7% figure last year.

Any improvement in general economic and particularly manufacturing growth in the U.S. is positive for Mexico. U.S. consumer demand for durable goods recently has been strong, at its best level in more than a year. A better showing in manufacturing means more demand for industrial inputs. And Mexico is particularly well positioned for supplying the U.S. market with vehicles, automotive and aerospace parts and components and high-tech electronics.

This year in the U.S., like Mexico, will be an intense political year, with all that implies. A President will be elected or reelected. The possible spillover from aggressive electioneering should never be discounted in either economy.

However, the U.S. does seem to be in a relatively stronger position to combat the tsunami effect of a meltdown of the Euro or a major sovereign debt collapse by one or more of the weaker European economies. For one thing, and it is truly important, the U.S. banking system seems to be much healthier and more prepared than it was when the 2008 crisis took place.

According to Christopher Koch, research economist with the Federal Reserve Bank of Dallas, the overall pickup in U.S. economic activity in the fourth quarter of 2011, and in January and early February waxes positive for longer-term growth this year. In late January, Koch stated flatly that "the effects (on the U.S. economy) of the debt-ceiling scare and the Euro crisis appear temporary", although he added that "risk of a slowdown in Europe continues to loom".

The bottom line: Mexico's economic prospects this year as of now seem to have the following variables: growth of 3.5% or better (Probability: 40%), growth of less than 3.5% but above 3% (Probability: 40%), growth of less than 3% but with no recession (Probability: 20%).
John Christman has been tracking Mexico's maquiladora industry since its beginnings in the mid-1960s. He still keeps tabs on the industry, although officially retired. Of his jobs in Mexico, most of his work has focused on the Mexican economy, foreign trade, direct foreign investment and most particularly the maquiladora industry. A native of Cleveland, Ohio and a graduate of Northwestern University. Before retiring, he was in charge of what is now IHS Global Insight's Maquiladora Macroeconomic Service for 11 years Over the years, he has been a frequent author and speaker in Mexico and abroad on Mexico matters, primarily maquiladoras.
He may be contacted at: