Mexico: Don’t write off the Aztec Tiger

Last December, when Mexico's president Enrique Pea Nieto was elected, there was talk of Mexico turning into an "Aztec Tiger", thanks to structural reforms and auspicious fundamentals. But now "the tiger appears to have run out of puff", says John Paul Rathbone in the FT.

The economy actually shrank marginally in the second quarter the first decline in four years and the government has cut its 2013 GDP growth forecast to 1.8%. Protests against structural reforms have spread, while Mexican assets were caught in the emerging market sell-off.

But it's far too soon to write Mexico off. For starters, the economy shouldn't sink into recession. Leading indicators suggest that the poor second quarter is unlikely to be repeated. The recent slowdown is partly due to developments in the US, says Benito Berber of Nomura Securities. Mexico remains a leveraged play on America for now, as more than 80% of its exports go there. Mexican growth was bound to plateau after the strong rebound starting in 2010, especially with "fiscal headwinds in the US".

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But Mexico's long-term outlook is promising. It has a sophisticated and competitive manufacturing sector, helped by the gradual increase in China's labour costs. Inflation is under control and the public finances look solid. Unlike some other emerging economies, Mexico hasn't been on a debt binge in recent years. The ratio of bank lending-to-GDP, at 20%, has barely changed.

And it is making steady progress towards lifting its long-term growth rate. The government has passed measures to liberalise the labour market and bolster competition in the telecoms and media sectors. It is now taking steps to bolster the national tax take by 3% of GDP by 2018. Mexico currently only collects 14% of GDP in taxes, half the Western average. The package includes Mexico's first capital gains and dividend taxes.

Many analysts reckoned that the government could have been more ambitious by introducing sales tax on food and medicine, says Au.finance.yahoo.com, but Pea Nieto is trying to minimise opposition to his plans to allow private investment in state oil giant Pemex, which would give GDP another kick. Given all this, Mexico remains of interest to patient investors, who can bet on it with the iShares MSCI Mexico IMI Capped UCITS ETF (LSE: SMEX).