Fund manager's comment/Rory Hammerson
Things are looking rosy for Mexico in what is seen as the convergence story of the Americas. The ties between the US and Mexico are becoming stronger, driven by the integration of their border economies, and extend much further than production under the NAFTA free-trade agreement signed in 1994.
South of the border, the old political regime ended after last year's victory by the PAN, led by Vicente Fox, which beat the Institutional Revolutionary Party that had ruled the country for seven decades.
High oil prices, which represent 30% of fiscal revenues, are boosting the Treasury's coffers. Capital flows continue to flood into the country, supporting a strong peso and accentuating economic confidence, as demonstrated by Citicorp's $12.5bn bid for Banamex, Mexico's largest bank.
Inflation is well into single digits and investor confidence is running high, with the local bolsa up 27% in US dollar terms this year. Despite the economic slowdown in the US ' the destination for 80% of Mexican exports and the source of 25% of its GDP ' there are still good prospects for growth this year.
President Fox made many promises to secure his victory and will be expected to deliver. His handling of the Zapatista rebels march through the capital earlier this year was not entirely successful. In pressing for an Indian rights bill, Fox lost the confidence of various factions in Congress, which he must re-secure if he is to pass the Fiscal Reform Law deemed necessary to finance his spending plans.
Originally planned for June, the probability of passing the law before the end of this year is declining fast. The reform was set to achieve savings of 4% of GDP, though with time these are being watered down to half of that. Plans for the deregulation and eventual privatisation of the state-run energy sector are proving convoluted, and even the sure-fire VAT collection improvements are likely to see a further round of exemptions.
To capture a better perspective of where Mexico has reached in the marathon towards economic maturity, we should compare it with its regional counterparts.
The Mexican bolsa's strength is partly as a result of investors avoiding Brazil, the other powerhouse economy in Latin America. The Brazilian real has weakened because of a rash of political scandals that could lead to a parliamentary investigation. In addition, Brazil's investment-starved electricity sector is about to undergo enforced energy rationing, which will slow economic growth this year and heap further pressure on the government.
Mexico seems a safe haven from the squall whipping up in the Southern Cone and may well continue as the home for dedicated Latin funds.
Investors may prefer to focus on secular growth and convergence themes, rather than the short-term economic slowdown and the end of a new government's honeymoon period.
l Convergence with the US is maturing.
l Increased capital flows benefit all industries.
l Lower interest rates help sustain growth.
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