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Mexico: Under-rated, Unloved and Underappreciated

Mexico is the country with the most potential for 2012.


A dozen years ago, the credit rating agencies took the financial world by surprise by upgrading Mexico to investment grade. The move was only four years after the country teetered on the brink of collapse. The so-called Tequila Crisis of 1995 required a bailout by the IMF, World Bank and U.S. Treasury. In the aftermath of the crisis, the country abandoned its pegged exchange rate regime, sold off its major banks, introduced pension fund reforms and implemented an austere fiscal adjustment program. The measures worked well, and the country was quickly on the road to recovery. However, there was still a long list of reforms that were needed before it could be elevated into the elite club of investment grade countries. Moreover, most market participants thought that the rating agencies would wait until after the 2000 presidential election before making their move. However, Moody’s pre-empted the market by granting Mexico an investment grade rating before any of the milestones were reached, and (coincidently) at the same time it inaugurated its new office in Mexico City. Moody’s added further fuel to the controversy by quickly moving it up another notch, thus leaving its rival to explain why it still considered Mexico to be in the sub-investment grade category. Eventually, S&P capitulated, after intense lobbying by the Street, and it created the second such rated country in Latin America. Fortunately, Mexico was able to perform, and it has since become one of the most mature economies of Latin America. However, it is still one of the most underappreciated countries of the region.

Like an old car with a sputtering engine, the Mexican economy was side-lined by the commotion that overcame the rest of the region. The BRIC-craze brought an enormous amount of attention on a vast range of Latin American countries. Today, Mexico is rated the same or below Panama, Colombia, Peru and Brazil. Only the bad boys of the region, Argentina, Ecuador and Venezuela, have a lower rating. This is amazing considering Mexico’s economic record. To begin with, it is the only country in the region to raise its GDP forecast for 2012. The new outlook is 3% y/y. This is thanks to the improvement in the U.S. economy. It is one of the only countries in the world to have implemented a fiscal adjustment in the midst of the global crisis of 2008. Mexico has a truly floating exchange rate regime that allows it to easily absorb shocks without producing inflationary pressures. Foreign Direct Investment (FDI) continues unabated as global manufacturing firms take advantage of Mexico’s skilled workforce and strong industrial base. Debt to GDP is very low, at 27%, and consumer credit as a percentage of GDP is one of the lowest in the Western Hemisphere. Mexico also has a highly sophisticated political system, with the peaceful transition between parties. This is in contrast to the political machines and dynasties that dominate much of Latin America. The fact that Mexico is no longer the object of hype does not mean that it should be unloved.

Last of all, Mexico is the country with the most potential for 2012. The expected victory of Enrique Pena Nieto in the upcoming presidential elections may be good for the Mexican economy. The former Governor of the State of Mexico is a fresh face, with ambitious ideas. Although he is closely tied with the PRI machinery that controlled the country for almost 70 years, he is proposing the introduction of much-needed constitutional reforms to open up the oil sector. Such a change would transform the Mexican economy, giving it a much needed fiscal boost. His election may also help bring an end to the terrible violence that is engulfing the interior of the country. More than 55,000 lives were lost since the conflict started, and it is laying waste to the tourism sector. Although some resort areas remain strong, travel within Mexico collapsed. Many businesspeople prefer doing conference calls and video-conferences rather than braving the roads or visiting secondary and tertiary cities. The return of the PRI may restore order to the hinterland, and allow Mexico to return to its traditional peaceful state of nature. The nasty headlines make Mexico one of the most underappreciated markets of Latin America, even though it has some of the best management and numbers. The fact that Mexico is under-rated, unloved and unappreciated means that it is one of the only bargains in the emerging market world. Mexico has first rate corporations with immense exposure to the U.S. economy, one of the only parts of the market that should outperform the rest of the planet. Therefore, forget the hype and take another look at Mexico. You may be pleasantly surprised.

Walter Molano is head of research at BCP Securities. 


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