Mexico & Nafta - March 2008 (ISSN 1741-444X)

So far, the effects of the slowdown in the US economy on Mexico have been muted. Looking at Mexican statistics, the US economy does not appear to have hit the buffers, even though crisis-mongers in the US are talking up the prospect of a major turning point in capitalism. Mexico's exports of vehicles to the US leapt in January, while the final figure for remittances from the US to Mexico in 2007 showed a marginal increase.

The Mexican vehicle industry illustrates the point that things are not as bad in the US economy as some people hope. In January 2008 the Mexican vehicle industry's exports were up by 33% (compared with January 2007) at 118, 416 vehicles. The main reason was a more than doubling of export sales by Volkswagen. General Motors also saw a major rise in exports. For both companies, the US is the main export market for their Mexican operations.

For all the vehicle manufacturing companies, exports in 2007 to the US, though up, increased by less than motor executives had originally hoped. There were significant increases in exports of vehicles from Mexico to Europe and Latin America: European exports were up by 58% and exports to South America were up by 73%.

The US, though, is the key market. In January 2008 vehicle exports to the US were up by 25%; this was a smaller rise than for exports to South America (up 38%) or Europe (up 82%). On the other hand at 99,842, vehicle exports to the US account for 84% of total Mexican vehicle exports.

The January jump in exports was much higher than the trend. For 2007, vehicle exports from Mexico were up by 5% at 1,613,313 vehicles. In both January 2008 and indeed for 2007 as a whole, buoyant exports, mostly to the US, have helped the motor industry offset the effect of a sluggish domestic market. In 2007 domestic sales of new cars were down by 3.5% compared with 2006. This January new vehicle sales were down by 0.8% on January 2007.

César Flores, the president of the Asociación Mexicana de la Industria Automotriz (AMIA), attributed the weakness of the domestic market (in which sales fell to 2004 levels) to four factors: consumers' uncertainty about how the fiscal reform (including the new Impuesto Empresarial de Tasa Única or IETU) which comes into force this year), will affect them; worries about fuel price increases; general worries about the economic outlook; and, finally, the huge business of importing used cars into Mexico. This trade, he said, had undermined domestic sales of cheap new cars.

In 2007, Mexican car makers exported 80% of their production of 2.02m vehicles. This year China First Automobile Works Group (FAW Group), plans to start work on its first plant in the country: it will come into production in 2010.

Remittances

Overall, remittances from the US to Mexico were up by 1% in 2007 at US$23.979bn, according to figures from the central bank. The Banco de México blamed the growing anti-immigrant sentiment in the US for the slowdown in the growth of remittances: in 2006 remittance revenues were 16% higher than in 2005.

It is worth noting that remittance revenues exceeded foreign direct investment (FDI), which amounted to US$23.23bn. Mexican policymakers are assuming that remittances will hold at their current levels in 2008 and that the flow will continue to make a major contribution to the country's balance of payments.

Without remittances, the country's balance of payments would be under strain. There are growing signs that the government is over-stimulating the domestic economy. This is sucking in imports. The danger of this policy is that the government is relying on boosting the domestic economy to counter-act any slowdown in the US economy.

Even with remittances, the county ran a US$7.37bn (0.8% of GDP) deficit on its current account. The biggest deficits were on trade (US$11.19bn for 2007) and services (US$20.533bn). Transfers (principally remittances) covered this. The most important items in the service account are tourism and interest and dividend payments. Foreign direct investment, which goes into the capital account, more than financed the overall current account deficit and led to an increase in central bank reserves.

Overall exports in 2007 came to US$272bn, up 8.9% on 2006. Worryingly for policymakers, the bulk of the increase in export revenues came from oil exports, which set a new record in 2007 of US$42.885bn, up 10% on 2006. Over the next few years, unless oil prices rise further, oil export revenues are likely to fall as Mexican oil output diminishes.

Imports were up by 10.6% on 2006, at US$283.23bn. Imports of capital goods were up by 13.7%, consumer goods by 16.7%, and intermediate goods by 8.9%. The finance minister, Agustí­n Carstens, argues that the government has the resources to pep up domestic demand - and so keep the economy moving - if the US economy turns down.

Carstens' major initiative is the creation of the Fondo Nacional de Infraestructura, which he launched on 6 February. The fund will be set up with M$40bn (US$3.7bn). It will use the money to build infrastructure and create jobs. Carstens hopes that the fund will create 100,000 jobs in 2008. The money for the FNI was earmarked in the 2008 budget and is part of the government's strategy to counter the effects of any economic slowdown in the US. The FNI will back road, rail, bridge, sewage, mass transit and reforestation projects.

The size of the boost is considerable, given that the construction industry in Mexico has a total annual output of around US$50bn. The general assumption in Mexico is that the construction industry would need to grow at around 10% to compensate for the slowdown in the US economy. Carstens' package is not far short of this. It is significant that the industry has the capacity to grow at double digit rates: it did so in 1996 and 1997 when it was bouncing back from the disaster of 1995. In the whole six years of the Fox administration, however, the fastest growth in construction was in 2006 when the rate hit 7%.

Currently as the car production figures show, there is no sign that US demand has tumbled off a cliff. Indeed, the US economy does not seem even to be suffering from the problems it ran into in 2001 and 2002, which had a major effect on the Mexican economy and, arguably, undermined President Vicente Fox's administration.

The government has already lowered its GDP growth target for 2008. It had been hoping for 3.8% but now concedes that 2.9% is more likely. This means that instead of creating 750,000 new jobs in the formal sector, the economy will create only about 600,000 for the 1m or so Mexicans joining the labour market.

GDP growth in 2007: A surprisingly strong final quarter growth figure of 3.8% meant that in 2007 the annual growth rate was 3.3%.

• Inflation

The strength of domestic demand led to higher than expected inflation in 2007. The government set the Banco de México a target of 3% inflation for 2007. The rate for 2007 was actually 3.76%. Inflation in December was 0.41 %, down from November's 0.7%. In January, inflation was 0.46 %. The 12 month rate was also much the same as it was for 2007 at 3.7%.

• Reserves

The country's foreign reserves broke through the US$80bn barrier at the end of January. On 1 February they came to US$80.12bn. This was US$2.13bn more than at the end of 2007.