The future health of the Mexican economy depends to a large extent on whether President Vicente Fox ...
The future health of the Mexican economy depends to a large extent on whether President Vicente Fox is able to push through his fiscal reforms, according to Phil Milburn, investment manager emerging markets at Aegon Asset Management. He believes the goal of the government is to decrease its dependence on oil.
But Alan Nesbit, head of Latin America at First State Investments, argues that this dependence has been decreasing for some years now.
He says: 'There has been an evolution of the economy over the last 10 years and oil is not as important as it once was.'
Nesbit says that Mexico's market was one of the best performing in the world last year, with the Mexican IPC index up 23.9% for the year to 7 August in dollar terms.
Fox is hoping to push through a series of fiscal reforms, the most important and unpopular of which is the imposition of VAT on food and medicine. Milburn says it is important that Fox can persuade elements of the opposition party not to vote against the reforms as he has invested a lot of political capital in getting them through. The fiscal reforms are also important because they will help the country attract more inward investment.
Milburn says: 'Standard & Poor's will upgrade its sovereign debt to investment grade, which will mean that the cost of financing the government will go down.'
Nesbit agrees that Fox's credibility and the subsequent health of the economy depend on the successful implementation of the reforms.
He says that the market expects the reforms to be factored into prices and that a failure to implement them would lead to a fall.
Big blue-chip companies will be the first to benefit from the re-rating of government debt, says Milburn giving the example of Tamsa, which makes steel tubing for the oil industry. He says that increasing the burden of tax on the consumer would allow the government to decrease what it takes from the oil industry.
'Pemex, the government owned oil company, will be encouraged to use money gained from tax cuts to invest in exploration which needs steel tubing,' he adds.
The banking sector is another that will benefit from a tightening of fiscal policy and the upgrade of government debt, according to Milburn. The one blue-chip stock remaining in this sector is Bancomer and interest in the company has remained high because it is thought that the Spanish banking group BBVA will increase its holdings from the current level of 41%.
The purchase of Benacci Bank by Citigroup has seen confidence grow in the sector but the influx of dollars has seen a strong peso that has hit manufacturing.
Nesbit points to construction as another area likely to benefit from Fox's policy to use government revenue to build housing for the poor. The house builder Ara, which concentrates on building homes for middle and low income earners, is well placed to benefit from government funded projects, he says.
On a more international scale, he points to global cement company Cemex as well placed to benefit from a recovery in the US.
• Fox's reforms should allow upgrade of debt.
• Spending plans benefit construction firms.
• Lower taxes should mean more investment.
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