AN INTRODUCTION TO OUR EMERGING MARKETS SERIES

As you may know, there are different key characteristics that countries must have to be considered an emerging market. Two examples of those characteristics are having a lower-to-middle per capita income or having some sort of regulatory body as well as a market exchange for investment and common currency. The Morgan Stanley Capital International Emerging Market Index (MSCI Index) is the governing power that categorizes and reports out on new emerging markets.

The term “emerging markets” is exciting for businesses, as it insinuates higher growth rates and higher opportunity in comparison to developed countries. That being said, emerging markets all see an increased climate for sociopolitical instability and volatility. Every emerging market is plagued by one or more of the following: military unease, social upheaval, natural disasters, price shocks, and other causes that create high volatility.

Now that we have laid out the “science,” we are thrilled to introduce you to our “Emerging Market” blog series! We will use this series to educate on the strengths, weaknesses, opportunities, and threats of the present-day emerging markets. We will dive into the year so far, the political climate, risks, and rewards and finally - the biggest areas of opportunity.

In our previous emerging markets blog, we discussed the business opportunities arising in Turkey. In the newest installment of our series, we are traveling to North America. We will dive into Mexico’s key characteristics that allow them to be on the MSCI Emerging Markets Index. Throughout the article, you will find us discussing foreign relations, Mexico’s most opportune areas, and which industries make the most sense for expansion.

THE YEAR IN REVIEW

As the second-largest economy in Latin America and the fourteenth largest in the world, Mexico is considered an emerging market heavyweight. Falling just short of the threshold required for classification as a developed country, the country has made commendable efforts towards increasing access to clean running water and quality medical care in its more poverty-stricken regions, and is poised for substantial economic growth. Currently, Mexico has more trade agreements than any other nation, and market observers believe that the Mexican economy has the potential to become the eighth-largest in the world by 2050.  

During 2019, Mexico experienced a technical recession, with the economy contracting by about 0.1% for three straight quarters. This economic slump came as a surprise - Mexico’s geographic proximity and solid trade agreements with the U.S. historically meant that their economies mirrored each other,  expanding and declining in unison. Yet, the American economy is growing, and many analysts cannot help but compare the economic climate to that during the Mexican peso crisis.  

Despite sluggish domestic activity, external demand has exceeded expectations. Import substitution, a result of the ongoing tariff war between the U.S. and China, has benefited Mexico. According to the United Nations Conference on Trade and Development (UNCTAD), Mexico brought in $3.5 billion in U.S. dollars as a result of the trade conflict. The increased demand for exports, the recovery in gas & oil output, and the increase in construction activity, has bolstered the forecast of Mexican economic growth in 2020, which is expected to expand by 1.1%.

In addition, Mexico is working with the U.S. House of Representatives on a new trade agreement that affects both Mexico and Canada. Outlooks are positive for this relationship.

GOVERNMENT

Mexico has been struggling to stave off recession ever since President Andrés Manuel López Obrador (known as AMLO) took office in December 2018, pledging to reduce unnecessary expenditures. The federal administration has since imposed significant cutbacks on public outlays, and while the result does display a level of fiscal discipline, the downside is the decline in economic growth. Only robust demand from the United States has prevented a bigger slowdown.

In addition, Mexico is affected by the migrant caravan. While the country lacks the capacity to sustain the large number of immigrants flowing in from Central America, it also struggles with the volatility of protests along the U.S. border and seeks to avoid antagonizing U.S. President Donald Trump, who has threatened to impose tariffs on all Mexican goods if the country does not redouble its immigration enforcement efforts.

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WEIGHING RISKS AND REWARDS

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FAST PACED GROWTH

Mexico ranks 71st out of 187 countries in terms of the UN’s Human Development Index (HDI), which stands just under the 0.80 mark and far outscores the average developing nation. Similarly, the country’s per capita GDP falls just $1,615 U.S. dollars short of qualifying as a developed country.

The country’s strongest emerging market economy characteristic lies in the pace of its development.  While Mexico still has broad swaths of abject poverty, these regions are receding rather than steadily growing. In addition, the new trade deals with the U.S. and Canada represent potential to increase its rate of development even further.

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FALL OF CRITICAL EXPORTS

International trade equates to 77% of Mexico’s GDP and the country is the 12th largest exporter in the world. Yet, in the last year, the demand for Mexican automobiles, the country’s second-largest export, significantly decreased.

According to Mexico’s National Institute of Statistics and Geography (INEGI), “Mexico’s auto production slipped by 4.1% to 3,750,841 units.” In addition, a forecast by the Mexican Association of the Automotive Industry (AMIA) indicates that auto exports will decelerate even further during 2020, a result of declining global and domestic demand.

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MINIMUM WAGE INCREASE

Since his election in 2018, the decisions of Mexico’s president, AMLO, have been controversial among citizens. Many do not agree with the practices he employs to boost the Mexican economy.

On two separate occasions since the election, AMLO has increased the minimum wage in an attempt to ameliorate the deep divisions that continue to define Mexico’s economy. Buoyed by success in attracting investment in the electronics, automotive, and aerospace sectors over the last thirty years, Mexican products have become increasingly complex. Yet, overall wages remain quite low in comparison to other OECD countries.

In 2018, a typical minimum wage worker in Mexico took home just over $2,000, around a tenth of the salary earned by minimum wage workers in France, the U.K. and Canada, and less than half of the take-home pay of minimum wage workers in Brazil and Colombia.

This is a particularly hot topic as Mexico is inflating minimum wage by over 20% in 2020 during a time of low economic growth.

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OIL HEDGING PROGRAM

Designed to protect the Mexican economy against oil price crashes, Mexico’s oil hedging program remains the world’s largest financial oil deal. Typically, Mexico hedges its oil using options, which allows it to sell at a predetermined price, regardless of the current market price. This strategy also allows it to reserve a portion to backstop its oil sales.

The Mexican economy is heavily reliant on oil sales, but their contribution to the federal budget has decreased over the past few years. During 2019, Mexico’s creditworthiness came under increasing scrutiny. Two rating agencies flipped their sovereign outlook to negative, another downgraded its rating, and one has already allocated Pemex bonds under “junk” status.

In addition, this was the first year since 2001 that the finance ministry did not disclose the program’s overall cost.  

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POSSIBLE GROWTH OPPORTUNITIES

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E-COMMERCE

The E-Commerce market in Mexico has been improving in recent years. In 2018, in particular, it reached $20 billion U.S. dollars. This represents a 20% growth compared to 2017. In 2019, the market is estimated to reach $9.441 billion U.S. dollars, representing a growth rate of nearly 7.9% over the year.

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FINANCIAL TECHNOLOGY

Thanks to a regulatory framework and weak banking, Mexico encourages the creation of foreign small and medium-sized enterprises (SMEs). Nicolas Shea, the founder of the Chilean platform Cumplo, believes that the country has extraordinary potential in terms of fintech. The size of its economy (and therefore its potential fintech consumers) makes it a highly attractive industry.

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ENERGY

As the world’s ninth-largest crude oil reserve and fourth-largest natural gas reserve in the Americas, the energy industry contributes about 3% of GDP, representing 8% of exports. The sector attracted FDI levels of $38.79 billion U.S. dollars in 2018. Electricity transmission and distribution, and pipeline gas transport are the two industries that received the largest shares, with $594.2 million U.S. dollars and $543 million U.S. dollars respectively.

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CANNABIS

Mexico City is soon to be opening up its hemp and medical cannabis market. According to some studies in 2018, the value of this market was $47.3 million U.S. dollars, with a growth rate of 27.7%. There is a growing acceptance of cannabis in the country, region, and global health sector, indicating a bright future for cannabis business.

We will be highlighting a new emerging market every month and we challenge you to think big for your business. If you’re interested in expanding globally or learning more about potential opportunities, please reach out to us via our contact page or email us at hello@castusglobal.com.