Mexico: Risk Assessment

Country Rating¹

Rating: A4

Business Climate Rating¹

Rating: A4

Risk Assessment²

Continued growth

With an economy closely linked to that of the USA (this country absorbs nearly 80% of Mexican exports), Mexico's growth should continue through 2012 thanks to rising US demand leading to benefits for manufacturing industry and tourism. Transfers from expatriate workers (13 million Mexicans live in the US) should continue to increase. Domestic demand will continue to drive growth, drawing strength from the pre-electoral measures, implemented by the government ahead of July's elections, to bolster household consumption, private investment, credit and job creation.

Relatively sound financial situation

Increased revenues, particularly from oil and the moderation of spending enabled a reduction in the public deficit in 2011. The government is expected to continue its prudent fiscal policy and the central government deficit is accordingly expected to decline further. However, this prudence will be mitigated by expenditure aimed at encouraging job creation and the large-scale investments being made by the state-owned company Petroleos de Mexico (Pemex) amounting to 2% of GDP. Closed to FDIs, the sector relies completely on government finance for its investment projects. Moreover, maintaining Pemex's productive capacity is strategic since the revenues it generates represent over a third of government revenue.

Despite the increase (in value) of oil exports, the current account deficit grew in 2011 as a result of much higher imports, drawn in by buoyant domestic demand. In 2012, the additional imports should be offset by the increase in emigrant worker remittances and tourist revenues. The decline in oil production will be offset by higher prices. Financing needs will be met by foreign capital inflows but FDI will remain below the level reached in 2007. The country is not likely to have a financing problem as its foreign exchange reserves are rising and it enjoys a precautionary Flexible Credit Line granted by the IMF until January 2013. Amounting to $73 billion, this will strengthen investor confidence and increase the country's ability to withstand a liquidity crisis.

The payment experience remains close to the world average.

In 2011 payment delays recorded by Coface remained above the global average. SMEs are still handicapped by the banks' restrictive lending policy, which favors the government and large firms. Moreover, despite the strength of the banking sector, if the eurozone crisis deteriorates, the country could be negatively affected through the subsidiaries of Spanish banks which enjoy a large market share. Despite the boost from the US economy, no changes in payment behavior are expected.

Lagging pace of reforms and persistent insecurity

Given the unpopularity of President Felipe Calderon's government, his party, the PAN (Partido Accion Nacional) is unlikely to succeed in getting its candidate Josefina Vasquez Mota elected to the presidency in July 2012. The most probable result will be a return of the PRI (Partido Revolucionario Institucional), after 12 years out of power, with Peña Nieto, the former governor of the State of Mexico. Between now and the next elections, key structural reforms like those of the labor market, education and health are unlikely to be implemented, coming up against strong political and social resistance. Unless one of the parties holds a large majority in Congress, which is unlikely given the voting system, the progress of the reforms is likely to be impeded even after the elections. Moreover, the deteriorating climate of insecurity and violence, resulting particularly from the war conducted by the authorities against organized crime linked to the drug trafficking, represents a growing challenge to the authority of the state and has a negative impact on the business environment.

Strengths

• Manufacturing sector sustained by the North American Free Trade Agreement
• Moderate foreign debt
• Relatively healthy banking sector
• Favorable demographics

Weaknesses

• Dependence on the USA for exports, investments and transfers from emigrant workers
• Vulnerability of public finances to the decline of oil reserves
• Socio-political obstacles to structural reforms (energy, telecoms, education, labor, legal system)
• Business environment undermined by bureaucracy, inadequate infrastructures and insecurity