By Mark Artherton, a fund manager at F&C Mexico is a long way from the ideal of a free market an...
By Mark Artherton, a fund manager at F&C
Mexico is a long way from the ideal of a free market and disappointment in the reform agenda has impacted upon its financial performance in the past 12 months.
The country is positively impacted by its geographic position, however, with the largest single consumer market in the world on its doorstep.
The reform programme that sustained Mexican equity performance in 2001 is highly unlikely to be repeated going forward. In 2001, Mexico benefited from sharply falling interest rates and gaining investment grade status from the major rating agencies.
The outlook has changed this year, however. The main problem is president Vicente Fox's inability to pass effective reforms. Mexico is in the enviable situation of having a strong balance sheet that is set up in a stable fashion. Even if the opaque government accounting is clarified, the position remains sustainable, with debt to GDP around 45%.
However, there are many areas in which Mexico could make fundamental changes. Fiscal reform is seen as a missed opportunity and electricity reform, social security reform and clamping down on corruption are stalling.
The government defused the potential crisis at Pemex, the state oil company. Pemex is by far the largest company in Mexico but is hopelessly bloated and has suffered from under-investment for the past 15 years.
Pemex workers were threatening to strike if they were not given a wage hike of 15%. After intense negotiation, the agreed settlement was an increase of 7.3% in total benefits. This was considered a good victory for president Fox as he will continue with the corruption cases against some union leaders at Pemex.
The three union leaders also happen to be congressmen, making prosecution more difficult as congressmen have immunity from prosecution.
One of the major reasons for the successful conclusion of the wage talks was the decision by the PRI, the main opposition party, to change tack and step back from their support of the unions. The reason for this was simple: polls had shown the majority of the electorate did not support the union leaders.
With congressional elections in 2003, this position is unsurprising. However, it is unlikely the strength Fox has gained from the Pemex issue will be transformed into a sustained and successful push for deep reforms. The PRI remains unlikely to back any significant reform but may allow the passage of watered down reforms to show it does not always block everything the government does.
On the economic front, growth is picking up slowly but with the export outlook not improving, domestic confidence is likely to remain weak. Interest rates have had a tendency to rise recently so further monetary easing is unlikely, especially as the currency remains vulnerable.
Mexican exports continue to be competitive, increasing market share in the US, but an overriding concern is China. However, Mexico does have one large advantage: the border with the US.
With the reform agenda off the boil but a solid balance sheet position, the Mexican market is more than ever dialed into the performance of the US economy and markets.
Mexico has a strong balance sheet.
Strong geographic position.
Growth has been picking up.
Significant reform looks unlikely.
Exports and domestic confidence weak.
China posing a threat to the economy.
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