Down Mexico

Oct 13th 2009

From Economist.com

Brazil-envy is rife in Latin America’s other big economy

When Brazil was not only included but named first among the BRICs, the widely used acronym for the leading emerging economies, Mexican business leaders protested that their country should also have been there. Well, maybe. But adding an "M" to the initial letters of Brazil, Russia, India and China would have made the name much less catchy (MBRICs? BRIMCs?). And the man who coined the acronym in 2001, Jim O’Neill of Goldman Sachs, has said that Mexico (along with South Korea) was in fact considered, but did not quite fit.

Mexico’s Brazil-envy is more intense than ever, as this columnist discovered last week in Mexico City. One local business leader said he was optimistic about the economic outlook, but that was because “I choose to be, because I don’t want the alternative—and, besides, next year can’t be any worse than this, can it?” Others mostly seemed worried, predicting several difficult years ahead.

Alamy

The Mexican economy was hit hard by the slump that followed the collapse of Lehman Brothers last year. Brazil’s economy suffered much less—and is already roaring back, in sharp contrast to Mexico’s. This is symbolised by the strength of Brazil’s stockmarket. Last week Santander, a Spanish bank, raised $7 billion by selling shares in its Brazilian subsidiary, the biggest share offering the country has seen. In June the initial public offering (IPO) of Visanet, a Brazilian credit-card firm, raised almost $5 billion, and there are several other big local offerings in the pipeline. By contrast, the most recent IPO in Mexico was in June 2008.

Part of the problem is that Mexico, especially since the creation of the North American Free-Trade Area, has increasingly specialised in making things cheaply for export to America, a strategy that looks less than brilliant now that the American consumer is on strike. Meanwhile, commodity-rich Brazil is benefiting from exporting to China, which has made up for weaker exports to America with a domestic spending binge which, among other things, requires lots of imported materials to build new infrastructure.

But that is by no means the only difference between the two economies. Mexico has lately been plagued by some serious management gaffes. Cemex, a cement firm that was not so long ago an exemplar of the trend for world-beating multinationals to emerge from developing economies, is suffering serious indigestion after borrowing heavily to make foreign acquisitions at the peak of the market.

Comercial Mexicana, the country’s third-largest retailer, lost a fortune after a currency hedge moved against it when the dollar soared during the financial crisis. This presented an opportunity to Wal-Mart, an American retailer which is the market leader in Mexico. It has taken advantage of its rival’s weakness by expanding rapidly, opening a couple of hundred new stores in the country this year. The only other business with such ambition in Mexico at the moment is the empire of Carlos Slim, a telecoms magnate, which has also been busy expanding during the crisis. More success for the powerful Mr Slim—now perhaps the richest man on earth—is regarded even by Mexicans as something of a mixed blessing.

Mexican business people are also depressed by growing fears for their own security. Violence is increasing in the country as the government takes on the illegal drug cartels, prompting them to retaliate brutally. Mexico is now close to the top of the list of countries where kidnapping is likely. Crime in Brazil’s cities is also bad, but it does not seem to be getting notably worse.

Pemex continues to decline as Brazil's oil reserves, and its state oil firm, Petrobras, soar

In the eyes of business leaders the government’s lack of success against organised crime is on a par with its failure to reform the economy. Although some business people are content that the Mexican economy is dominated by a small, powerful clique, many feel that the lack of competition is a serious problem. Many also lament the failure to reform the sluggish state oil and gas monopoly, Pemex, which continues to decline as Brazil’s reserves, and its state oil firm, Petrobras, soar. Just as worrying is the slow progress in revamping the tax system. Mexico has one of the world’s lowest ratios of tax collection to GDP, which deprives the government of the funds it needs to do its job properly.

Brazilian entrepreneurs found that President Luiz Inácio Lula da Silva and his Workers’ Party were much less hostile towards business in office than in opposition. Lula’s most likely successor in next year’s election is an experienced figure from the business-friendly Social Democrats, who in their last stint in the presidency passed vital reforms that laid the foundations for Brazil’s recent strong growth

In Mexico, judging by the mood at last week’s Economist conference in Mexico City, President Felipe Calderón may frustrate the business community, yet business leaders have little enthusiasm for the favourite to succeed him, the soap-star-dating governor of Mexico State, Enrique Peña Nieto. Still, at least they take some comfort from the fact that the hard left’s candidate, Andrés Manuel López Obrador, who so nearly defeated Mr Calderón for the presidency three years ago, is lagging in the polls.

Mexican business leaders fear that their president, following his party’s heavy defeat in recent parliamentary elections, may see out his remaining three years as a lame duck. The one hope is that, seeing how bad things look, Mr Calderón may be provoked into embarking upon the fundamental reforms that the economy so badly needs. In that light, what could be more encouraging than the government’s decision on October 12th to take on one of Mexico’s most powerful unions by closing down a big, state-run electricity provider? If this battle is won, perhaps Mexican business people can start believing that their country has what it takes to become more competitive and powerful than its big rival down south. If not, plenty more gloom and doom are likely to follow.

via economist.com

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