Published: August 14th, 2013
Production of medical devices in Mexico is expected to grow by 74% from 2011 to 2020, rising from $8,562 to $14,914 million. The overall annual growth rate over that time of 6.4% will outpace other NAFTA countries as well as Germany, Japan, and Switzerland. According to ProMexico, the Mexican government pro-trade organization, there were 2321 “economic units” in the country related to devices in 2010. Of those, 744 were exporters, with those businesses located mainly in Baja California, Chihuahua, Coahuila, Distrito Federal, Estado de México, Jalisco, Nuevo León, Sonora and Tamaulipa.
Approximately 67 of those device exporters are located in Baja, including big name device firms like Smiths, Tyco Healthcare, Cardinal Health, Pall Life Sciences, Medtronic, Gambro, Medimexico, ICU Medical Inc., Hudson Aci, Dj Ortho, CLP, Sunrise Medical, and North Safety Products.
Those companies have helped make Mexico the 11th largest medical device exporter in the world, according to ProMexico, including being the main exporter in Latin America and the leading supplier to the U.S. More than 80% of Mexico’s exports are destined for the U.S. which receives 24% of all autos and auto parts from Mexico along with 21% of electronic products.
A huge market and a shared border make California a key trade conduit, with goods flowing both ways. California was the second largest exporting U.S. state to Mexico ($20.9 billion in 2010, 17% of the total of $163.3 billion) behind only Texas ($56 billion, 59% of the total). California is also the second largest importing state from Mexico, behind Texas once again, with imports of $33 billion.
Moving beyond fridges and Fords
Proximity to the U.S. and lower costs are driving the segment in much the same way they’ve promoted other plastics heavy industries like appliances, automotive, and electronics to locate manufacturing south of the border.
In 2011, according to KPMG, Mexican manufacturing costs in medical devices were 23.3% lower than in the U.S. KPMG noted that Mexico is working hard to expand beyond its traditional industrial sectors. “The country is an increasingly attractive destination for aerospace companies, medical equipment manufacturers, and software developers which are expected to play a growing role in the economy,” KPMG stated in a report.
First BRIC now MIST
For years, the so-called BRIC countries of Brazil, Russia, India, and China have been looked to to lead growth in the developing world, but in 2011, a new acronym was born. MIST, short for Mexico, Indonesia, South Korea, and Turkey, was coined by Goldman Sach’s Jim O’Neil.
In 2011, Mexico was the 14th largest economy in the world, but by 2020, it is expected to become the largest economy in Latin America and the world’s 7th largest economy, passing BRIC nations Russia, Brazil, and India.
Injection molding machine suppliers set up shop
The activity in Mexico has not been lost on injection molding machine suppliers, with Milacron, Arburg, Engel, andKraussMaffei, all announcing Mexiccan subsidiaries in recent years, several of which are in the state of Querétaro.
2012 has been a study in contrasts as far as Latin America’s two biggest economies, Brazil and Mexico, are concerned.
Brazil, which overtook Britain last year to become the world’s sixth largest economy, has been hit by weakening Chinese demand for commodities, while rival Mexico, the new darling of foreign investors, is posting increasingly strong growth.
The figures speak for themselves.
Brazil, for a decade Latin America’s unchallenged behemoth, is expected to grow a mere one percent this year, down from 2.7 percent in 2011 and a sizzling 7.5 percent in 2010, according to official figures.
By contrast, Mexico, the perennial underachiever in Latin America, is suddenly eying a position among the world’s 10 largest economies with projected growth of between 3.5 and four percent.
Mexico took a massive hit from the 2007-2008 financial crisis, thanks in large part to its proximity to the United States, and its economy contracted a whopping six percent in 2009.
But a huge reduction in Mexico’s “country cost” — the cost of doing business there — sparked an impressive turnaround that attracted investment in its industrial sector, created jobs and added value to its exports.
Sebastian Briozzo, head of sovereign ratings at Standard & Poor’s for Latin America, said the two countries have very different growth patterns.
“Brazil is a closed economy, in which production grows based on internal demand, particularly domestic consumption and not so much on investment,” he told AFP. “Mexico on the other hand is more dependent on the US industrial sector.”
Juan Jensen, head of macro-economics at Brazilian consulting firm Tendencias, attributed the slowdown in Brazil’s $2.5 trillion economy to a major loss of competitiveness reflected in salaries that far outpaced inflation.
“Brazil lost because of its higher production costs,” Jensen said, adding that the Brazilian government’s tolerance of higher inflation and opaque fiscal policy had been problematic.
“This surely scared off (foreign) investors… who find other countries, including Mexico, with better prospects for good returns on their investment,” he said.
Mexico, which has built on NAFTA since 1994 and now does more than 90 percent of its foreign dealings under free trade agreements, continues to lower its production costs to compete, including with China.
“Mexico continues to offer cheap labor, has an infrastructure for some ‘durable goods’ such as automobiles, computers and home appliances,” said Octavio Gutierrez, chief economist at BBVA bank in Mexico City.
This enables it to quickly expand production for exports to the all-important US market and explains the relocation of industrial plants to Mexico as “one of the pillars” of the country’s development, he added.
“The difference with Brazil has to do with costs. Mexico has increased unit labor costs much less than Brazil,” Gutierrez said.
Brazil has recorded a worrying fall in productive investment, down 4.5 percent, and a sharp 2.7 percent contraction in its industrial output, according to the National Confederation of Industry.
Meanwhile, Mexico is reaping the benefit of a slow but steady pickup in demand for its products in the United States. Its industry grew 4.2 percent between January and September this year compared with the same period in 2011.
Economists see the difference in foreign trade focus as the key factor that explains the contrasting performances of the Latin American rivals.
“Brazil is almost returning to its model of the 1960s, which was to look inward, to be more protectionist and to subsidize companies,” said Claudio Loser, the former director of the Western Hemisphere Department at the IMF who now heads the Latin American branch of the Centennial Group think tank.
“I think Mexico has an economy which overall is much more efficient and better integrated with the world than that of Brazil, which rested a bit on its laurels,” he added.
“Mexico has opened its borders, signing free trade agreements, including with China. In so doing it imports cheap goods, adds value and re-exports these goods to the United States,” he said.
“Brazil does the opposite: It closes itself, tries to produce locally and ends up producing more expensive goods which it has a hard time re-exporting.”
That said, Jensen still expected Brazil’s GDP to grow 3.2 percent next year as he foresaw a cut in taxes on industrial products and some sort of currency devaluation that should stoke interest in its industrial sector.
September 30 2012 at 03:37pm
Here’s a bold prediction for 2022, the year of another World Cup: Mexico will beat Brazil.
While soccer-mad Mexicans dream of defeating their regional rivals for the ultimate trophy, some analysts say 2022 may actually be the year when Mexico dribbles past Brazil to become Latin America’s biggest economy.
And Brazil is not the only global powerhouse that Mexico is challenging. China’s rising wages are making Mexico an increasingly attractive location for manufacturers, who are flocking here despite a relentless drug war.
The country’s rising fortune has inspired a series of optimistic notes by analysts from some of the world’s biggest financial firms.
“We forecast that Mexico may overtake Brazil as the No.1 economy in Latin America as early as 2022, on the back of strong growth in human capital and total factor productivity,” Nomura Group analysts wrote last month.
“Embarking on a trajectory of high growth will mark the birth of the first, not tiger, but ‘jaguar’ country in Latam.”
Mexico posted growth of 3.9 percent in 2011 and the central bank is forecasting growth of as much as 4.25 percent this year. Brazil’s growth slowed to 2.7 percent last year, while a mere 1.6 percent is forecast for this year.
Brazil’s slowdown came after it enjoyed a “golden decade” fueled by China’s appetite for commodities following the Asian giant’s entry into the World Trade Organization in 2001, Nomura stated in a previous note in May.
Mexico, meanwhile, is at “the dawn of a new era” as more and more manufacturers set up shop here due to China’s growing labor costs, the Asia-based financial firm added.
The Boston Consulting Group, a global management consulting firm, says it could already be cheaper to produce in Mexico than in China.
“We believe that this year … the costs of producing in Mexico are the same or lower than the costs of producing in China,” Hal Sirkin, a senior partner at the Boston Consulting Group, told AFP.
Average manufacturing wages, when adjusted to productivity, were $3.06 an hour in Mexico in 2010 compared to $2.72 in China, he said. By 2015, They will rise to $5.30 in China and just $3.55 in Mexico.
Sharing a border with the United States, the world’s biggest importer, has helped too. But reliance on the United States has its risks.
“The substantive role that external conditions have played in Mexico’s economic recovery makes their eventual weakening a fundamental risk,” said Mexican central bank deputy governor Manuel Sanchez.
“In particular, if US industrial production slows, Mexican manufacturing exports may decelerate notably,” he said in New York on Friday, according to a copy of his speech.
Barclay’s bank analyst Marco Oviedo wrote on September 6 that, after lagging Chinese manufacturing exports for a decade, Mexico took the lead after 2008-2009.
“We believe this change is likely to be structural and persistent,” Oviedo wrote.
Mexico became the world’s fourth biggest car exporter this year, jumping from fifth place, and other industries are increasingly moving production here, from aerospace to electronics and telecommunications.
This year alone, Nissan, Ford, and BMW announced plans to open new factories or increase production in Mexico.
Audi became this month the latest auto maker to decide to set up shop in Mexico. The plant in San Jose Chiapa, central Mexico, will create 3,000 to 4,000 jobs and produce 150,000 cars a year when it opens in 2016.
“This will allow us to ship our cars duty free to the USA, Latin America and Europe,” Uwe Hans Werner, an Audi spokesman, told AFP. “This decision will lower our costs and increase our profit margins and will give us a definite competitive advantage with customers.”
Manufacturers keep coming even though Mexico has endured a wave of drug-related violence that has killed some 60,000 people in the last six years.
“Some are saying ‘we will take the risk’ and others say ‘we don’t want to take the risk if violence goes out of control,’“ Sirkin said. “This is one of the issues companies think about.”
The violence has weighed on Mexico’s economic output. The national statistics institute said Thursday that crime cost the economy 211.9 billion pesos ($16.5 billion) in 2011, or 1.38 percent of gross domestic product. – Sapa-AFP
Kenneth Rapoza, Contributor – Covering Brazil, Russia, India & China.
7/10/2012 @ 10:38PM
Last year, Indonesia was the little darling of emerging market investors. This year, it’s Mexico.
When strategists at big Brazilian investment firms like Itau steer their wealth management clients away from their home country and up north, to Mexico, it’s worth noting. Brazil is a big country. It’s got a diverse economy. But it’s no longer Latin America’s favorite growth story. It’s going to grow around 2 percent this year, worse than it did last year. It’s fortunes are tied to China, to some extent, an economy still facing a hardish soft landing and needing monetary stimulus.
Mexico, on the other hand, has the U.S., which is growing faster than Brazil this year. Plus, Mexico is cheaper now than China.
When it comes to portfolio investment, Mexico is the clear winner this year. The iShares MSCI Mexico (EWW) exchange traded fund is up 14.09 percent year to date ending July 10 while the MSCI Emerging markets index is up only 0.7 percent. The iShares FTSE China (FXI) ETF is down 7 percent. iShares MSCI Brazil (EWZ) is down 11.3 percent. And last year’s fave, the Market Vectors Indonesia (IDX) is down 5.6 percent.
The return of the PRI to Mexican politics, Mexico’s pricing powers, and its proximity to the largest market in the world has Nomura Securities saying on Tuesday that over the next decade, Mexico is poised to become Latin America’s largest economy, surpassing Brazil, and become one of the emerging markets’ most dynamic economies.
The PRI party and Enrique Pena Nieto have regained the presidency and the Lower House. Unlike in previous elections, the party supports structural, pro-market, reforms.
In relative terms, the Mexican banking sector remains one of Latin America’s smallest, particularly relative to the level of economic development. So there is a lot of room to grow. Private sector debt to GDP is barely 20 percent versus an average of around 50 percent for Brazil and as high as almost 80 percent in Chile.
Mexico’s economy and its banks are likely to be supported and even accelerated by positive demographics, hitting a sweet spot in 2020. Current projections point not only to Mexico showing one of the strongest levels of population growth among major economies, but also the greatest fall in the dependency ratio (proportion of young/old relative to the working age population). This means a greater relative increase in resources and potentially stronger GDP growth. Some of the benefits of this demographic dividend would not be automatic, but will likely depend on appropriate policy action and reform, members of Nomura’s banking and emerging markets team said in a report on Mexican banks dated July 10.
Audrey Kaplan, a portfolio manager for the $523 million Federated InterContinental (RIMAX) fund, told Forbes recently that Mexico is one of Federated’s favorites.
“The economy has been doing well and that’s got a lot to do with the U.S. Two years ago people said the U.S. would go into a flat growth or no growth environment. It has not, and that’s been beneficial to Mexico,” she said. “Plus wage growth in Mexico is flat and it’s rising in China. We’ve had an overweight there since the fall of 2009. A number of our shares in Mexico are up 40 to 70 absolute percent change since we purchased them,” she said, citing America Movil (AMX) as a top buy for Federated.
Brazil probably doesn’t have that much to worry about. The year 2020 is a long way off. A lot can happen in 8 years.
Brazil’s attractiveness as a top destination for foreign-direct investment was taken over by Indonesia last year, however, the United Nations Conference on Trade and Development said last week in an annual report.
Brazil is seen as the world’s No. 5 destination for foreign direct investment (FDI) over the next two years, UNCTAD said. Brazil used to be No. 4.
The top three “prospective host economies” for FDI were unchanged this year from 2011, with China holding the No. 1 spot, followed by the U.S. and India. Indonesia moved up two notches in the rankings to surpass Brazil at the No. 4 spot. UNCTAD’s figures are from a survey, not actual FDI numbers.
FDI to Brazil, which calculates what investors and corporations pump into a foreign economy, stands at around $45 billion, while Mexico FDI is not yet near $30 billion.
This article is available online at:
With so much money accumulated on the sidelines of the highly volatile markets in America and Europe, international investors are having a tough time selecting a destination for their next investment. According to the 2011 report by the National Commission of Foreign Investment, Brazil rated 5th and Mexico 19th in the list of country recipients of Direct Foreign Investment (DFI) during 2010; with the U.S. placing 1st, China 2nd and Hong Kong 3rd.
Amidst an unstable economy with interest rates drastically low, investors who prefer placing their funds in America face the following alternatives: a) investing in the U.S. or Canada, with lower risks but also lower yields or b) investing in Brazil or Mexico, which have a higher risk level, but provide a much higher initial return on investment. At first sight, Brazil may appear to be a better choice given that it is already a part of the BRIC group of leading emerging economies, while Mexico is a step away from being included in this group. However, after an in-depth analysis of these two prominent Latin-American economies and the collateral key factors that influence their performance and future opportunities, Mexico may be the better choice.
Though Brazil’s GDP in 2010 was estimated at $2.172 billion, the world’s 8th largest economy, and Mexico’s at $1.567 billion, the world’s 12th largest economy, one has to consider Brazil’s population of 194.946 million compared to Mexico’s population of 113.423 million. Mexico’s economic performance during the past decade has been remarkable. Its GDP grew 170.32% from $920 billion in 2001 to $1.567 billion in 2010, while Brazil’s GDP growth during the same period was 162.08%.
An important factor is Brazil’s economy is not as heavily dependent on the U.S. economy as Mexico’s. 25% of Brazil’s exports go to the U.S., compared to 78% of Mexico’s. Thus, when the U.S. economy declines it has a much greater impact on Mexico than it does on Brazil. During the 2009 recession, Mexico’s GDP had a -6.5% change, compared to Brazil’s -0.2%. Both countries had extraordinary GDP performances in 2010 but Mexico impressed the world posting a +5.5% growth, an 11% total advance from its contraction point the previous year.
Strategic Location, Logistics & Trade
Mexico is the envy of most other countries, due to its strategic location next to the world’s largest economy. It is no surprise to find that Mexico is the world’s No. 1 television screen manufacturer and the world’s 9th largest auto manufacturer. Mexico exports more cars to the U.S. than Japan, Korea, Germany or the UK. In addition, Mexico has free trade agreements with 43 countries, including the U.S., Canada, the UE and several countries of Latin-America, which makes it an ideal country to manufacture and export. This gives Mexico a substantial edge over Brazil, who does not yet have free trade agreements with U.S., Canada, or many of the other countries with whom Mexico has trade treaties. Brazil and the U.S. approach trade policy quite differently, whereas Mexico, the U.S., and Canada have similar approaches which were conducive to the signing of the NAFTA agreement. Brazil is the 15th largest U.S. export market; a distant second to Mexico as the United States’ No. 1 trading partner in Latin America.
Brazil and the U.S. look at trade liberalization from different perspectives. The U.S.’s view is characterized as “competitive liberalization,” while Brazil is characterized as taking a narrower, more cautious track. Although the United States is Brazil’s largest single-country trading partner, Brazil has resisted increasing trade liberalization with the U.S. Brazil’s trade preferences are with Mercosul, which is more important to the economic and political life of Brazil, as expressed in the CRS Congress Report on Brazilian Trade Policy with the U.S.
In addition to Mexico’s strategic location, existing auto parts suppliers, competitiveness and high quality labor, another key factor of Mexico’s success in attracting major automobile and aerospace manufacturing firms has been the openness of its trade policies. The latest example of a major project landing in Mexico, instead of competing China or Brazil, is the new Mazda manufacturing facility, which will be built in Salamanca, Guanajuato, with an investment of $500 million and a potential capacity to produce 140,000 units per year.
Currency, Monetary Policy and Rate of Inflation
Brazil’s currency policies are strongly based in the Real (Reais in English). Most international contracts are made based in the local Real currency. Lease contracts (for office, retail or industrial space) are made in Reals, leaving open an exchange risk in the event of major currency devaluation. Brazil has been trying to contain inflation for the past decade. Inflation in 2011 stands at 6.52% and the expected inflation for 2012 is 5.53%. The Reais-US Dollar rate of exchange has been quite unstable as shown below, currently standing around 1.7 in 2011.
In contrast, Mexico’s inflation has been kept under control since 2003. According to INEGI, in August of 2011, Mexico’s annual inflation was set at 3.42 %.( 3.1% lower than Brazil’s).
In comparison to Brazil, Mexico’s economy is highly dollarized. Most international transactions are US-dollar based and for the most part large business transactions and especially real estate sale or lease contracts are made in US Dollars; a business practice that is much preferred by the international investors community.
Mexico’s commercial real estate, especially the office and industrial market segments have experienced remarkable growth during the past five years. Investments in these sectors have consistently seen two-digit yields. Visitors in Mexico City are impressed by the number and quality of trophy high raise buildings under construction or recently completed that are changing the City’s skyline from Reforma-Polanco to Santa Fe.
Country Risk Factor
Mexico’s Country Risk Factor (J.P. MORGAN) has been and is lower than Brazil’s. In October 9, 2011 Mexico’s EMBI+ was 223 bp while Brazil’s was set at 257 bp. Furthermore, the IMF estimate of an economic crisis probability assigned a 0.56% index to Mexico and 3.34% to Brazil.
Crime and Image
Although according to UNESCO’s 2011 study on homicide rates Brazil has a homicide rate of 22 per 100,000 people and Mexico’s rate is only 18, Brazil has a much better public image of safety worldwide. Brazil has been much more effective in handling its public image than Mexico. As a point of comparison, USA’s homicide rate is 5 per 100,000 inhabitants. No one questions that one of Mexico’s top priorities should be finding and enforcing a successful formula to get organized crime under control as well as to launch an effective campaign to improve its image to the world.
The most recent “Doing Business” economy rankings by the World Bank and the International Finance Corporation, benchmarked in June 2011, ranked Mexico as the 53rd out of the 183 economies rated on the ease of doing business, while Brazil ranked 126th, India 132nd and China 91st.Thus, doing business with Mexico is rated considerably higher than the three economies that integrate the BRIC group.
Investors narrowing choice
Investors analyzing Mexico’s comparative performance, open market policies, trends and unique opportunities this country offers in the manufacturing, real estate and tourism industries, may find difficult making a selection between Brazil and Mexico. All matters considered, they might be inclined, as many already have, in selecting Mexico as the most desirable place to invest in comparison to Brazil. Provided that Mexico adheres to its strong commitment to fiscal consolidation, continues to move forward with infrastructure expansion and institutions improvement, and works toward improving its public image, Mexico appears to be on the threshold of a new era of extraordinary expansion that could place its economy among the world’s top ten.
Oscar J. Franck Terrazas, FRICS is Managing Director of Integra Realty Resources de Mexico. It has more than 25 years of experience in the real estate industry and international business. Mr. Terrazas is a member of several organizations: The Royal Institution of Chartered Surveyors (FRICS designation); the Appraisal Institute, the Association of the International Right of Way Association (IRWA) and FIABCI (International Real State Federation). It is also a member of the Advisory Councils of Nacional Financiera (NAFIN) and Bancomext. Oscar J. Franck Terrazas can be reached at his E-mail: firstname.lastname@example.org.
Mexican wrestlers usually dress up as animals, gods and ancient heroes. But a more recent archetype has been hard to knock out: the Chinese dragon. And just when Mexicans thought they could start chanting victory about the resurgence of its manufacturing export sector, along comes Nomura and gives the points to the Chinese.
Analysts at the Japanese bank warned on Friday that Chinese competition has moved onto higher leagues, with Mexico “increasingly being pushed out of intermediate and high value added manufacturing”, just as it has pushed it out of lower-value added since 2001.
The factors that have kept Chinese productivity adjusted labour costs below those of Mexico include, the report adds, “infrastructure investment, an undervalued exchange rate and, low interest rates.”
The duel is not a new one. “Demographic characteristics predisposed China and Mexico towards leveraging comparative advantage in labor intensive production,” states the research report. And yes, for about a decade the idea that China has cheaper labour and greater production capacity than Mexico’s manufacturing sector has been commonplace; several clothing and toy outfits went east. This was initially hard to digest for the Mexicans.
But should Mexico worry? After all, the country’s share of US imports at 12.5 per cent is the highest in a decade. This was possible not only because Mexican workers became more skilled than Chinese -stepping into areas of manufacturing such as car making and electronics assembly-, but also because they have been serving the US market for years. Analysts at Nomura recognise there is still an edge:
While Mexico is finding some success in lower-value added production that China is no longer targeting, it is possible for Mexico to make a comeback in higher value added production.
Nomura also highlights that Renmimbi appreciation and possible reductions in export tax rebates should benefit Mexico as well as identifying that in the near future there will be a loss of the “demographic advantage” from the Chinese side. And despite noting there is nothing set on stone and that investment from China to Mexico is still “marginal”, they believe ”the good days for Mexico are still ahead”:
Mexico may come to play a role in the supply chains of Chinese firms seeking to expand market share in the US. Reports indicate that Chinese automakers including Geeley and First Auto Works are planning on building production facilities in Mexico to aid penetration of North and Latin American markets. Shifting production to Mexico will likely be limited to manufacturers of products with high transport costs (such as vehicles) or for export categories for which Mexico has preferential tariff treatment under NAFTA.
So even if China advances, Mexico is still fighting its corner as a regional force and a natural manufacturer of US goods – last month Mazda said it will build its first plant in Mexico and this week it was announced that Foxconn, which manufactures the iPhone for Apple, will absorb 5,000 of Cisco’s recent layoffs in one of its Mexican units.
Mexico is still on its feet due to a handful of factors, such as the abovementioned skilled labour force, a combination of wage inflation in China and wage stagnation in Mexico, and the benefits of the North American Free Trade Agreement. But one inherent strength Mexico has over China is geography: as long as the US needs cheap and well-made parts, China will never throw Mexico out of the ring.
Jun 30th 2011 | from the print edition
WHEN the term “emerging markets” was coined 30 years ago by Antoine van Agtmael, then at the World Bank, these economies accounted for one-third of global GDP (measured at purchasing-power parity). Now they make up more than half. More dramatic still, emerging markets produced more than four-fifths of global real GDP growth over the past five years.
Important though these countries are, many commentators still tend to lump them together in a way they never would with developed economies. Headlines about rising inflation, rampant bank lending and a flood of capital inflows might appear to suggest that virtually all emerging economies are overheating. In reality, some are red-hot and others are only lukewarm. An analysis by The Economist tries to identify the hottest spots.
The chart shows our ranking of 27 emerging economies according to their risk of overheating. We take each economy’s temperature using six different indicators. The scores from these indicators are then summed to produce an overall index; 100 means that an economy is red-hot on all six measures. (The rankings for all of the individual indicators can be found here)
Start with inflation. This has jumped more sharply in emerging economies than in the developed world, to an estimated average rate of 6.7% in May. But it ranges from a modest 1.7% in Taiwan to 20% or more in Vietnam, Venezuela and Argentina (using private-sector estimates for the latter rather than the government’s lower but dubious figure). Most of the pickup in inflation over the past year was due to higher food prices, which have a bigger share of the consumer-price basket than in rich countries. So if food prices stabilise, headline inflation will fall later this year. In China core inflation (excluding food and energy) is only 2.4%, but it is a more worrying 5.5% in Brazil and over 8% in India. Where growth is bumping up against capacity constraints and labour markets are tight, food inflation may spill over into wages and other prices.
Our second indicator tries to gauge spare capacity by comparing a country’s average GDP growth rate since 2007 with its growth rate in the previous ten years. Growth has exceeded its long-term trend in Argentina, Brazil, India and Indonesia, but is well below trend (suggesting ample spare capacity) in Hungary, the Czech Republic, Russia and South Africa. China’s growth has also been slightly below trend. An economy’s potential growth rate may have increased over time, thanks to reforms. However, tight labour markets (our third indicator) confirm that several economies have been growing unsustainably fast. In Argentina, Brazil, Indonesia and Hong Kong unemployment is well below its ten-year average. Brazil’s jobless rate is at a record low and wages are accelerating.
The fourth symptom of overheating, and one of the most important, is excessive credit expansion, which can lead to asset bubbles as well as inflation. The best measure of excess credit is the difference between the growth rate in bank credit and nominal GDP. It is normal for bank lending to grow a bit faster than GDP in an emerging economy as the financial sector develops, but credit is outpacing GDP by an alarming margin in Argentina, Brazil, Hong Kong and Turkey. Lending to the private sector has increased by around 20% more than nominal GDP over the past year in both Turkey and Hong Kong. But not all emerging economies are awash with liquidity. In ten of the 27 countries, including Russia, South Africa, Egypt and Chile, credit is growing more slowly than GDP. The growth rate in China’s bank lending has halved over the past year or so, and is now broadly in line with GDP growth.
Our fifth indicator is the real rate of interest, which is negative in over half of the economies. That may be appropriate where demand is weak but in rapidly growing economies, such as Argentina, India, Vietnam and Hong Kong, negative real rates are fuelling faster credit growth and inflation. At the other extreme, Brazil’s real interest rate of almost 6% is among the highest in the world. China’s benchmark lending rate is slightly positive but this understates the extent of its recent monetary tightening: the central bank has also sharply raised banks’ reserve requirements and capped credit growth.
Our final temperature gauge is the external balance. A widening current-account deficit can be a classic sign of overheating, as domestic demand outpaces supply. Turkey looks particularly worrying, with its deficit expected to jump to 8% of GDP this year, up from 2% in 2009. Rising current-account deficits in Brazil and India also suggest domestic demand is growing too fast.
Adding up the six scores reveals seven hotspots where most of the indicators are flashing red: Argentina, Brazil, Hong Kong, India, Indonesia, Turkey and Vietnam. Argentina is the only economy where all six indicators are on red, but Brazil and India are not far behind. China, often the focus of concerns about overheating, is well down the rankings in the amber zone, partly thanks to more aggressive monetary tightening. Russia, Mexico and South Africa are in the green zone, suggesting little risk of overheating.
Red-hot economies with negative real interest rates need to raise them. Fiscal policy is also too loose in many places. Budget deficits have been reduced slightly since 2009 but this is largely because strong growth has boosted tax revenues. On a general-government definition, six of the seven are still running quite large deficits (8% of GDP in India, for example); only Hong Kong’s government is in surplus. Given that their economies are booming, all of them should arguably be running a surplus. Drivers who ignore red warning lights on the dashboard risk a serious breakdown.
When all eyes are focused on China, it is easy to overlook Mexico.
For the last decade or so, the common view has been that China’s vastly cheaper labour and greater production capacity are too much to handle for Mexico’s manufacturing export sector.
But a research note on Tuesday by RBC Capital Markets comes as a timely reminder that in the battle for market share of US imports, Mexico is far from beaten.
Indeed, Mexico’s share of that market, the world’s largest, finished 2010 at about 12.5 per cent – the highest in a decade. At current trends, Mexico could even overtake Canada within the next five years or so to become the US’s second-largest source of imports.
One reason, as RBC points out, is that while Chinese wages were roughly 300 per cent cheaper than those of Mexico a decade ago, wage inflation in China and wage stagnation in Mexico have combined to close the gap to almost zero.
A second reason is simply that China is a lot further away than Mexico. That may not matter in a world of cheap energy, but today’s rising transport costs give Mexico an edge, particularly when it comes to heavy and bulky items.
Factor in Mexico’s skilled labour force and the effects of the North American Free Trade Agreement (Nafta), which shield the country from the potential threat of protectionism, and it is little wonder that foreign companies keep going to Mexico.
As if proof were needed, Mazda, the Japanese car manufacturer, announced last week that it would invest $500m in a car-assembly plant with a capacity of 100,000 units a year.
RBC’s bottom line? “Mexico is becoming more attractive for manufacturing, particularly that aimed at the US market.”
By comparison, Mexico embarked on a similar reform process ten years earlier and earned its macroeconomic dividend in the 1990s, when Brazil was still struggling to rein in hyperinflation. Looking at per capita growth rates over the last twenty years (not just the last 7 or 8), Mexico and Brazil actually look fairly similar (with annual average per capita growth of 2.25% and 2.5% respectively).
While both countries have now solidified a range of necessary macro reforms, they face somewhat similar long term challenges. Both desperately need to invest in infrastructure, in education, and to find ways to reduce stark inequalities. Both too are now thriving democracies – a plus on so many levels, but not for pushing through big comprehensive reforms.
There are of course big differences – but those don’t necessarily cut just in Brazil’s favor. Brazil is a bigger market, has ever increasing oil finds, and is a complement to China’s rise – all positive. But it is also a more bloated state, stands in a much worse place vis-à-vis inequality and infrastructure, and faces worrisome inflationary and exchange rate pressures that threaten to undermine its recent gains.
Mexico is already a more export and manufacturing-led economy. And while Obama (and others) made much of the potential of US-Brazil trade during his March visit, the reality is that the United States already depends on Mexico as its second largest export market – earning some $163 bn last year compared to $35 bn with Brazil.
Mexico is also a much more friendly business environment. According the World Bank’s Doing Business index, Mexico ranks 35th globally – and the highest in Latin America — while Brazil is a woeful 127th (out of a total of 183 countries). On the downside, Mexico lacks widespread credit (which is much more available in Brazil), suffers from too many monopolies and oligopolies, and so far competes with (rather than complements) China’s rise.
The upshot is that there is no clear “winner” in terms of future potential or peril. So what drives the misguided conventional wisdom? A recent paper by Roberto Newell, founder of the Mexican Institute for Competitiveness (IMCO), provides a partial answer. Analyzing the Mexico coverage in the New York Times and Wall Street Journal since the late 1980s, he shows the increasingly negative tone and focus of the main U.S. papers of record. While political and economic news dominated both papers in the 1990s (in large part due to NAFTA), in recent years crime and the border have taken over the new cycle. Economic and political news – much of it good – rarely merit a mention, much less a sustained focus.
Without doing a similar in depth study, anecdotal readings of Brazil in the U.S. media shows the reverse – an almost ebullient focus on economics and politics, with relatively few stories on crime (even though Brazil’s 25 per 100,000 inhabitants murder rate far exceeds Mexico’s 14).
This negative shift isn’t because that is the only news coming out of Mexico. Yes Mexico’s security situation is grave, but it isn’t Mexico’s only story. As the brief comparison above shows, there are many economic and political strengths (and weaknesses) in both countries. Newell lays out many more of Mexico’s advantages and advances vis-à-vis the much touted BRICs, which include Brazil.
This skewed coverage hits both countries – though Mexico the hardest. For Brazil, it encourages the “hot money” flowing in, further aggravating the underlying economic weaknesses. For Mexico, the resoundingly negative take may, somewhat paradoxically, make it harder to address the security challenge. To see through necessary changes, Mexicans need some sense of optimism and can-do spirit, as well as a sense of what can be lost – and that is so much of what Mexico has gained.
Article printed from LatIntelligence: http://www.latintelligence.com
URL to article: http://www.latintelligence.com/2011/06/08/rethinking-the-scorecard-brazil-vs-mexico/
Illustration by Gary Neill
A new block of emerging powerhouses is poised to shatter existing global trade patterns. Is your business ready for the next wave?
Tim Shufelt, Financial Post Magazine · Apr. 5, 2011 | Last Updated: Apr. 5, 2011 11:59 AM ET
A new bloc of emerging economic powerhouses is poised to shatter existing global trade patterns. Is your business ready for the next wave?
Alfred Hanna was in Panama in December 1989 when the standoff between Gen. Manuel Noriega’s soldiers and the United States military boiled over. At the time, Hanna was overseeing a feasibility study for SNC-Lavalin Group Inc. on the construction of a pair of hydroelectric plants. Just before Christmas, U.S. President George Bush unleashed thousands of troops on the Central American nation to depose Noriega’s military dictatorship. Hanna’s bosses at the Montreal headquarters of the engineering giant asked if he wanted to abandon the work and the country. But the team decided to see the project through to its end. “The Panamanians have never forgotten that we persisted,” Hanna said. “Twenty years after, I go there and everybody remembers and wants to give us work.”
Then, as now, countries most Canadian business leaders consider “non-traditional” — the places they forgo in favour of the comfort and familiarity offered by established economies, especially the U.S. — are right in SNC-Lavalin’s wheelhouse. The company has built a sprawling international presence and knows what it takes to make money in parts of the world where the prospects for growth and the potential for instability are both high and interwoven. SNC-Lavalin’s global approach has since taken it to, among many other corners of the world, the Indonesian island of Sulawesi to construct the US$410-million Karebbe hydroelectric generating facility. “The potential in Indonesia is vast,” Hanna says. Indeed, Indonesia’s economic prospects are so buoyant that the world’s largest archipelago state is part of a basket of countries being hailed as the next axis of global growth. These countries, which have the potential capacity to rival the G7, have been dubbed The Next 11, or simply the N-11.
It’s common knowledge that the balance of global economic power is shifting, as is the need for Canadian industry to reduce its dependence on the U.S. So far, the focus of diversification has largely been on the existing champions of the emerging world: Brazil, Russia, India and, most of all, China — the BRIC nations. But as the world’s second-largest economy, China has officially emerged, says Katie Koch, senior portfolio strategist at Goldman Sachs, which came up with both the BRIC and N-11 monikers. “We don’t think the BRICs should be called emerging markets.”
Even some of the N-11 countries– specifically, Indonesia, Turkey, South Korea and Mexico — have graduated to “growth market” status, Koch says. She explains that any non-developed country is considered a growth market if it has at least a 1% share of global GDP. The remaining N-11 nations– Bangladesh, Egypt, Iran, Nigeria, Pakistan, Philippines and Vietnam — currently fall short, and also suffer from a large variance in terms of income levels, political and social stability, and investing environments. But despite potentially grave risks, all 11 countries are projected to post blistering rates of growth in the coming years. “Many of these countries have the scale, the growth trajectory and the aspirations to one day become at least 1% of global GDP,” Koch says.
The result could be a profound recalibration of the world economic order, according to long-term projections by Goldman Sachs. Collective GDP for the N-11 could reach two-thirds the size of the G7 by 2050, with twice the growth rate in consumer demand. Mexico is projected to become the world’s fifth-largest economy. Indonesia could overtake Japan. And six of the N-11, including Nigeria and Vietnam, could surpass Canada in economic size. “It can be humbling to see some of these changes in the world’s largest economies. Surprising and humbling,” Koch says. However, she adds: “This could play out to be a huge wealth-creation opportunity.”
Driving these changes are demographic forces. In the industrialized world, falling birth rates will constrain growth because countries will struggle to bolster their workforces. Meanwhile, increased longevity is contributing to aging populations that will increasingly sap economies of their financial resources. “It’s a weird kaleidoscope,” says George Friedman, the founder and CEO of Stratfor, a Texas-based political intelligence and forecasting consultant. “You’re seeing one trend that’s been going on for 300 years — the population explosion — ending. It’s transforming the way societies work. But some will be losers and some will be winners by the same phenomenon.”
Koch says the 15 countries that make up the BRIC and N-11 blocs will be the beneficiaries of shifting population tides. A shared trait among all of them is large populations. Indeed, total N-11 population already accounts for almost 20% of the world’s total, ranging from South Korea’s 50 million people to the 230 million who call Indonesia home. In addition, many of these populations are heavily skewed towards a younger demographic. For example, the median age in Nigeria is 19 years old. Combine that people power with the preconditions for growth, and the economic prospects quickly become explosive, Koch says.
But Friedman argues that it’s not enough to have the numbers, particularly if the growth in productive assets — everything from machinery and equipment to new buildings — is insufficient to predicate economic progress. China has tried to mask its lack of this capital formation and, in doing so, set itself up for an impending collapse, Friedman predicts. By slashing its profit margins, China has realized an extreme, prolonged pace of growth that lacks healthy returns on capital. And while the export market has taken off, the domestic economy has trailed behind. As a result, more than one billion Chinese live on less than US$6 a day, Friedman says. “The vast majority of China has a standard of living of sub-Saharan Africa.” To quell social unrest, Friedman predicts China will use its banking system to keep insolvent companies afloat and maintain employment, as Japan did in the 1990s. He suggests a range of possible outcomes for China, none of them good, and none of them leading to the country claiming global economic supremacy.
Turkey, by contrast, stands to make great economic strides by combining its growing workforce with substantial capital formation. And the spoils will go not just to the Turks, but also their neighbours, Friedman says. “Where Germany was an engine for European recovery in the 1950s and ’60s, Turkey becomes an engine for recovery and development in the Baltics, in the Caucasus, in the Arab world.”
One Canadian company that has already capitalized on the Turkish engine is Alliance Grain Traders Inc. Founded 10 years ago by Murad Al-Katib, a Turkish descendent born and raised in rural Saskatchewan, the one-time basement enterprise is now the world’s largest processor and exporter of lentils, controlling about one-third of the global trade. It has a $660-million market cap and grosses about $700 million annually. The company made its big transformative move in 2009, when it made a $100-million bet on Turkey by acquiring a Turkish counterpart. At the time, the deal was bigger than the size of Alliance itself.
“Think about the location of Istanbul,” Al-Katib says. He points out that a four-hour flight heading east or west out of Toronto might not breach Canada’s borders. But four hours in the air from the Turkish capital can land one in North Africa, Dubai, Moscow or London. Turkey is a strategic geographic play, but it has also established a vast trading network in the region that transcends political tensions. “Imagine a country with ties to the Islamic world, yet still has free trade with Israel,” Al-Katib says. “It also reaches into a customs union in the EU, and let’s not forget that all of the Central Asian republics are Turkic republics.”
Unlike some of its neighbours, Turkey has recovered well from the global recession, realizing robust economic growth with relatively low levels of unemployment and inflation, two forces central to the region’s recent uprisings. “Turkey is a diamond in the rough,” Al-Katib says. “It’s a country of stability in a region of instability. It’s within a different class.” A strong majority — and secular — government maintains political stability. And Turkey’s banking and lending community has reached a level of sophistication. “We have a big working capital requirement and we carry $150 million of Turkish bank credits in our Turkish operations,” he says.
Turkey’s already a regional leader, but its ascent in the decade ahead could transform the region’s economy and its influence could moderate the extremist elements that threaten to destabilize the Middle East, according to Stratfor’s forecast. “Of course, Turkey will feel tremendous internal tensions during this process, as is the case for any emerging power,” the report states, and the tension between Islamic and secular forces still represents a “deep fault line. It could falsify this forecast by plunging the country into chaos.”
But Turkey is not alone in this regard. All N-11 members share the potential for disaster, much more so than developed economies. From the chance of bombs dropping on Iran, to hostilities erupting in Pakistan, to the threat of soaring food prices and rampant inflation leading to more Egypt-style revolts, geopolitical risks loom over emerging markets. “The probability of any one of these countries being in a real crisis at any point in time is high,” Koch says.
Nowhere are these risks more glaring than in sub-Saharan Africa, a region that has come to epitomize failed development models and economic vulnerability due to political instability. Still, on a continental level, GDP growth has averaged 5% over the last 10 years, and growth rates of most African countries exceed those in the developed world. South of the Sahara, Nigeria is the region’s oil powerhouse and demographic giant, two assets qualifying it for inclusion in the N-11. In many ways, Nigeria is the great hope of sub-Saharan Africa, and Goldman Sachs projects it will surpass the Canadian economy within about 35 years. “It’s a great example of what other African nations can aspire to,” Koch says.
Nigeria is Africa’s biggest oil producer and ranks 10th in the world by proven reserves with about 2.7% of the global total. It has undergone substantial economic reform and has a credible central bank governor who is seemingly empowered to clean up the banking sector, says Philippe de Pontet, a sub-Saharan Africa analyst at the Eurasia Group, a political risk analysis firm based in New York. The country’s progress, however, has been made from a very low starting point. “From independence up until 1999, it was a terribly mismanaged country. Now I would say it’s just a very mismanaged country,” de Pontet says. Nigeria has much to overcome to realize its economic potential. Like most African states, it is composed of hostile factions thinly held together under a common flag. As a comparison, Friedman cites the tensions between the French and English throughout Canada’s history. “Multiply that a thousand times, and you’ve got Nigeria,” he says.
Among the N-11, South Korea is perhaps the most stable, which is telling given the potential for war in the Korean Peninsula. But South Korea is also among the most developed emerging economies and, like China, its rapidly rising income levels are leaving more and more consumers with money to burn and a demand for the trappings of Western consumer culture such as big-screen and 3-D movies. “There’s a very broad build-out of the entertainment sector in a lot of these markets,” says Richard Gelfond, CEO of Imax Corp.
In China, the number of multiplex screens has tripled to 6,000 over a three-year period, and that total is expected to rise to 25,000 within five years. “There’s also a tremendous demand for luxury-type products,” Gelfond says, calling the Imax offering an “affordable luxury.” Imax has already opened 10 theatres in South Korea, with seven more to come, the result of a deal signed late last year. “They have an appetite for the newest and the greatest,” Gelfond says. “Once our footprint gets to a certain critical mass there, we’ll start doing Korean movies in Imax.”
South Korea hardly seems like a country that belongs in a conversation about emerging markets. It is already “developed” in many senses. It is a member of the Organisation for Economic Co-operation and Development (OECD). Its GDP per capita of about US$20,000 is double that of Turkey or Mexico, about 10 times higher than the Philippines or Egypt, 20 times higher than Pakistan, and 30 times higher than Bangladesh.
However, North Korea’s shelling of a South Korean island late last year renewed fears of a broader military conflict that could potentially engage Western forces. “A big reason that country is still considered a non-developed market is because of geopolitical tensions,” Koch says. But even absent an unlikely resolution to the historic stalemate, South Korean growth prospects could soon vault the country ahead of some G7 economies, including Canada. Only one other N-11 member could do the same: Mexico.
Drug-related violence in Mexico garners plenty of headlines in Canada and the U.S., souring opinions on the state of the country and sullying its reputation as a premier tourist destination. But the drug trade has a huge upside, one on which Mexican expansion is largely based. After factoring in profit margins, drug exports to the U.S. net more than legal exports, Friedman says. “That’s the secret of Mexico. It’s a huge transfer of wealth from the United States to Mexico.”
What begins as a very low-cost agricultural crop ends up as an illicit form of capital formation, adds Friedman. Eventually, as drug money fuels expansion, cartel wars will settle and legitimate enterprises will become more profitable. “I regard Mexico as a real challenger to the United States later in the century,” Friedman says. “It’s going to have a very capable workforce.”
Montreal-based Bombardier Inc. saw a chance to take advantage of that workforce after the Mexican government about five years ago set out to establish an aerospace manufacturing cluster in central Queretaro state. With 90% of Bombardier’s revenues coming from outside of Canada, the transportation giant has an interest in diversifying its manufacturing base, and lower-cost labour in Mexico helps offset its domestic manufacturing costs.
Bombardier’s $200-million commitment began with relatively simple labour-intensive electrical assembly work. But the quality of the labour has advanced substantially, says Bombardier spokesman John Paul Macdonald. “In a very short time, they’re doing subcomponents, they’re doing Learjet 85 wings, they’re getting into more complex work.” The Mexican government has also partnered with the company to establish a specialized training facility. “It’s kind of like an aerospace trade school,” Macdonald says.
If Goldman Sachs’ predictions hold true, Mexico in 40 years will be the world’s fifth-largest economy, bigger than either Russia, Japan or Germany. But the rise of the N-11 will not just be based on attracting money from Western companies such as Bombardier, but on sowing a new crop of corporate champions, Koch says. “What is that going to do to the strategies of Canadian companies and U.S. companies still in the early stages of tapping into that pool of growth?” she asks. “That’s what the world’s going to be all about over the next decade. And for Western multinationals, the name of the game is getting into the middle of that.”
THE NEW ORDER
A Snapshot Of 11 Countries Set To Become Some Of The World’s Biggest Economies
MEXICO: Will be the world’s fifth-largest economy by 2050, predicts Goldman Sachs
NIGERIA: Economy could grow 12% this year if new government can resolve the Niger Delta conflict, fix the power sector and boost infrastructure
TURKEY: OECD expects its 6.7% growth rate from 2011-2017 to be the fastest in the N-11
IRAN: World Bank forecasts foreign investment of $2.9B despite international sanctions
PAKISTAN: Expected to strengthen ties with neighbouring China, which should help its economy
EGYPT: Unrest will probably cut economic growth in half to as low as 3%, says Central Bank
BANGLADESH: The N-11’s best-performing stock market grew 43.2% last year on the MSCI frontier markets index
INDONESIA: Fourth-most populous country is one of the most promising, say Citigroup economists
VIETNAM: The poorest N-11 country is expected to have the fastest-rising GDP per capita at 9.7% from 2009 to 2020
SOUTH KOREA: Its GDP per capita of $22,631 in 2009 was the highest in the N-11
PHILIPPINES: The president has asked investors to help build $16B worth of roads, bridges and schools
As a group of potentially large, fast-growing markets, with rising incomes and activity, the N-11 could be an important source of growth and opportunity both for companies and investors alike during the next two decades, according to a Goldman Sachs report in 2007.
The four BRIC nations -Brazil, Russia, India and China -have or will soon surpass Canada in terms of GDP, but Goldman Sachs predicts Mexico, Indonesia, Nigeria, South Korea, Turkey and Vietnam will do likewise by 2050.
Five of the N-11 countries-Turkey, Korea, Indonesia, Philippines and Mexico -are commonly found in emerging market investment indices, but the ability to access N-11 markets varies widely.