Calderon provides hope for Mexico -- Wait and see

January 31, 2007

At this year’s World Economic Forum, Felipe Calderón-Hinojosa, elected President of Mexico in November, outlined the priorities for his six-year term.

• Upholding legal institutions.
• Insuring public security, such as recent military sweeps to crack down on organized crime and corrupt local police
• Improving the country’s economic competitiveness.
• Providing better healthcare.
• Protecting the environment.

What Calderon’s Presidency means for Mexico:
President Calderon is right when he says that Mexico has the potential to be an emerging market heavy-weight. Mexico is about the size of Saudi Arabia, but has 5 times as many people and exports 1/4 of the oil. It’s GDP is just over $1 trillion, three times more than Saudi Arabia, and about the same as Canada, Spain and South Korea.

Mexico’s GDP growth was 4.5% in 2005 - slower than Saudi Arabia and the world average of 5%, but faster than Canada or the U.S. Despite that growth, it runs a slight trade deficit. Trade with the U.S. and Canada has tripled since the implementation of NAFTA in 1994, and 85% of its exports go to the U.S.

The economy faces several challenges, including the need to:

• Upgrade schools, roads and health care services,
• Modernize the tax system and labor laws, and
• Allow foreign direct investment to help extract more oil.

Since the oil companies are government owned, about half of the government’s income is dependent on oil. However, that would require it to either increase the tax rate, or expand the tax base to include its large non-taxed businesses, such as vendors. This would also require Mexico to eliminate corruption from its various local police forces.

Action Steps:
Mexico has a potentially good investment climate, but it is still too soon to say. Most emerging market funds have some exposure, anyway. Wait for Calderon to acheive success in tax reform, increased FDI in the energy sector and decrease in corruption before increasing your allocation.

Source: World Economic Forum Web Site, IMF “Article IV Consultation with Mexico”, October 11,2006;