Economy

Mexico has a free market economy, and is firmly established as an upper middle-income country with the highest per capita income in nominal terms in Latin America. Since 1994, Mexico has made an impressive recovery, building a modern and diversified economy. Recent administrations have also improved infrastructure and opened competition in seaports, railroads, telecommunications, electricity generation, natural gas distribution and airports.

According to the director for Colombia and Mexico of the World Bank, the population in extreme poverty has decreased from 24.2% to 17.6% in the general population and from 42% to 27.9% in rural areas from 2000-2004. Nonetheless, income inequality remains a problem, and huge gaps remain not only between rich and poor but also between the north and the south, the urban and the rural areas. Sharp contrasts in income and Human Development are also a grave problem in Mexico. The 2004 United Nations Human Development Index report for Mexico states that, Benito Juárez, one of the districts in the Distrito Federal and San Pedro Garza García, in the State of Nuevo Leon, would have a similar level of economic, educational and life expectancy development to that of Germany or New Zealand, whilst Metlatonoc in the state of Guerrero, would have an HDI similar to that of Malawi.

Many of the positive effects in poverty reduction and the increase in purchasing power of the middle class are attributed to the macroeconomic stability pursued by the last two administrations. GDP annual average growth for the period of 1995-2002 was 5.1%. The economic downturn in the United States also caused a similar pattern in Mexico, of which it rapidly recovered to grow 4.1% in 2005 and 3% in 2005. Inflation has reached a record low of 3.3% in 2005, and interest rates are low, which have spurred credit-consumption in the middle class. The Fox administration also provided monetary stability: budget deficit was further reduced and foreign debt was decreased to less than 20% of GDP. Mexico shares, with Chile the highest rating of long-term sovereign credit in Latin America.

Free Trade Agreements

Being one of the most open countries in the world, almost 90% of Mexican trade has been put under free trade agreements with over 40 countries, of which the North American Free Trade Agreement remains the most influential: close to 90% of Mexican exports go to the United States and Canada, and close to 55% from its imports come from these two countries. Other major trade agreements have been signed with the European Union, Japan, Israel and many countries in Central and South America.

Components of the Economy

Gross Domestic Product (GDP) in purchasing power parity (PPP) in 2006 was estimated at 1,134 trillion USD, and GDP per capita in PPP at 10,600 USD. The service sector is the largest component of GDP at 70.5%, followed by the industrial sector at 25.7%. Agriculture represents only 3.9% of GDP. Mexican labour force is estimated at 38 million of which 18% is occupied in agriculture, 24% in the industry sector and 58% in the service sector.

Agriculture and Food Production

After the Mexican Revolution Mexico began an agrarian reform, based on the 27th article of the Mexican Constitution than included transfer of land and/or free land distribution to peasants and small farmers under the concept of the ejido. This program was further extended during president Cárdenas administration during the 1930s and continued into the 1960s at varying rates. This cooperative agrarian reform, which guaranteed small farmers a means of subsistence livelihood, also caused land fragmentation and lack of capital investment, since commonly held land could not be used as collateral. In an effort to raise rural productivity and living standards, this constitutional article was amended in 1992 to allow for the transfer of property rights of the communal lands to farmers cultivating it. With the ability to rent or sell it, a way was open for the creation of larger farms and the advantages of economies of scale. Large mechanized farms are now operating in some north-eastern states (mainly in Sinaloa), however, privatisation of ejidos continues to be very slow in the central and southern states.

Up until the 1990s, the government encouraged the production of basic crops, mainly corn and beans by maintaining support prices and controlling imports through the National Company for Popular Subsistence (CONASUPO). With trade liberalization, however, CONASUPO was to be gradually dismantled and two new mechanisms were implemented: Alianza and Procampo. Alianza provides income payments and incentives for mechanization and advanced irrigation systems. Procampo is an income transfer subsidy to farmers. This support program provides 3.5 million farmers who produce basic commodities (mostly corn), and which represent 64% of all farmers, with a fixed income transfer payment per unit of area of cropland. This subsidy increased substantially during President Fox administration, mainly to white corn producers to reduce the amount of imports from the United States. This program has been successful, and in 2004, roughly only 15% of corn imports are white corn (the one used for human consumption and the type that is mostly grown in Mexico) as opposed to 85% of yellow and crashed corn (the one use for feeding livestock, and which is barely produced in Mexico).

Agriculture, as a percentage of GDP, has been steadily declining, and now resembles that of developed nations, in that it plays a smaller role in the economy. In 2006, agriculture accounted for only 3.9% of GDP, down from 7% in 1980, and 25% in 1970. Nonetheless, given the historic structure of ejidos, it still employs a considerably high percentage of the work force: 18% in 2003, mostly of which grows basic crops for subsistence, compared to 2-5% in developed nations in which production is highly mechanized.

In spite of being a staple in Mexican diet, Mexico's comparative advantage in agriculture is not in corn, but in horticulture, tropical fruits and vegetables. Negotiators of NAFTA expected that through liberalization and mechanization of agriculture, two-thirds of Mexican corn-producers would naturally shift from corn production to horticultural and other labour-intensive crops such as fruits, nuts, vegetables, coffee and sugar cane. While horticultural trade has drastically increased due to NAFTA, it has not absorbed displaced workers from corn production (estimated at around 600,000). Moreover, corn production has remained stable (at 20 million Tm), arguably, as a result of income support to farmers, or a reticence to abandon a millenarian tradition in Mexico: not only have peasants grown corn for millennia, corn originated in Mexico. Even today, Mexico is still the fourth largest corn producer in the world.

Industry

Main industries: Automobile industry, petrochemicals, cement and construction, textiles, food and beverages, mining, consumer durables, tourism.

The industrial sector as a whole have benefited from trade liberalisation; in 2000 it accounted for almost 90% of all export earnings. Amongst the most important industrial manufacturer in Mexico is the automotive industry, whose standards of quality are internationally recognised. The automobile sector in Mexico differs from that in other Latin American countries and developing nations in that it does not function as a mere assembly manufacturer. The industry produces technologically complex components and engages in some research and development activities. The 'Big Three' (General Motors, Ford and Chrysler have been operating in Mexico since the 1930s, while Volkswagen and Nissan built their plants in the 1960s. Now, Honda, BMW, and Mercedes-Benz joined in. Given the high requirements of North-American components in the industry, many European and Asian parts suppliers have also moved to Mexico: in Puebla alone, 70 industrial part-makers cluster around Volkswagen, the only producer of New Beetles and Jettas in the world.

Some large industries of Mexico include Cemex, the third largest cement conglomerate in the world, the alcohol beverage industries, including world-renowned players like Grupo Modelo, or conglomerates like FEMSA, which apart from owning breweries and the OXXO convenience store chain, is also the second-largest Coca-Cola bottler in the world, Gruma, the largest producer of corn flour and tortillas in the world, Bimbo, Telmex, Televisa, and many other high-tech industries, many of which are based in Monterrey. In 2001, according to the World Bank, high-tech industrial production represented 21% of total exports, the highest in Latin America.

Maquiladoras (Mexican factories which take in imported raw materials and produce goods for export) have become the landmark of trade in Mexico. This sector has benefited from NAFTA, in that real income in the maquiladora sector has increased 15.5% since 1994, though from the non-maquiladora sector has grown much faster. Contrary to popular belief, this should be no surprise since maquiladora's products could enter the US duty free since the 1960's industry agreement. Other sectors now benefit from the free trade agreement, and the share of exports from non-border states has increased in the last 5 years while the share of exports from maquiladora-border states has decreased.

Energy and Mineral Resources

Mineral resources are the 'nation's property' (i.e. public property) by constitution. As such, the energy sector is administered by the government with varying degrees of private investment. Mexico is the fifth-largest oil producer in the world, with 3.8 million barrels per day. Pemex, the public company in charge of administering research, exploitation and sales of oil, is the largest company (oil or otherwise) in Latin America, making 86 billion USD in sales a year, a sum larger than the GDP of some of the region's countries. Nonetheless, the company is heavily taxed (a significant source of revenue for the government, of almost 62 per cent of the company's sales). Without enough money to continue investing in finding new sources or upgrading infrastructure, and being protected constitutionally from private and foreign investment, some have predicted the company may face institutional collapse. While the oil industry is still relevant for the government's budget, its importance in GDP and exports has steadily fallen since the 1980s. In 1980 oil exports accounted for 61.6% of total exports; by 2000 it was only 7.3%.

Services

The service sector was estimated to account for 70.5% of the country's GDP, and employs 58% of the active population. This section includes transportation, commerce, warehousing, restaurant and hotels, arts and entertainment, health, education, financial and banking services, telecommunications as well as public administration and defence. Mexico's service sector has been strong, and in 2001 it replaced Brazil's as the largest service sector in Latin America in dollar terms.

Tourism is one of the most important industries in Mexico. It is the fourth largest source of foreign exchange for the country. Mexico is the eight most visited countries in the world (with over 20 million tourists a year). The most notable tourist draws are the ancient Meso-American ruins, and popular beach resorts. The coastal climate and unique culture - a fusion of the European (particularly Spanish) and the Meso-American - also make Mexico attractive. The peak tourist seasons in Mexico are during December and during July and August, with brief surges during the week before Easter and surges during spring break at many of the beach resort sites which are popular with vacationing college students from the United States.

The financial and banking sector is increasingly dominated by foreign companies or mergers of foreign and Mexican companies with the notable exception of Banorte. The acquisition of Banamex, one of the oldest surviving financial institutions in Mexico, by Citigroup was the largest US-Mexico corporate merger, at 12.5 billion USD. Banamex generates almost three times as much revenues than all 16 Citigroup's subsidiaries in the rest of Latin America. In spite of that, the largest financial institution in Mexico is Bancomer associated to the Spanish BBVA.

The process of institution building in the financial sector in Mexico has evolved hand in hand with the efforts of financial liberalization and of inserting the economy more fully into world markets. The financial sector is stable, thanks to a wave of acquisitions in recent years by foreign institutions such as US-based Citigroup, Spain's BBVA and the UK's HSBC. Their presence, along with a better regulatory framework, has allowed Mexico's banking system to recover from the 1994-95 peso devaluation. Lending to the public and private sector is increasing and so is activity in the areas of insurance, leasing and mortgages. However, bank credit accounts for only 22% of GDP, which is significantly low compared to 70% in Chile. Credit to the Agricultural sector has fallen 45.5% in six years (2001 to 2007), and now represents about 1% of total bank loans.

Financial Sector

Banking System

According to the IMF the Mexican banking system is strong, in which private banks are profitable and well-capitalized. The banking industry has experienced a series of changes since the system was nationalized by presidential decree during the foreign-debt crisis of 1982. Banks remained in government hands for a decade, until they were re-privatised in 1991-92. The period of state ownership weakened the system, because the government failed to build a firm regulatory and supervisory structure. It also discouraged lending and drove away most professional bankers. By the time of their re-privatisation, most banks were undercapitalized.

The first years of privatisation led to reckless (and sometimes fraudulent) lending as a result of poor supervision and lax regulations. Poor credit analysis procedures and weak internal controls characterised the sector during this time. Banks put themselves in a precarious position as their lending outpaced deposits, and they funded the shortfall through interbank borrowing - mainly from foreign banks. After the crisis of 1994, interest rates rose, at times, to over 100%, making the payment of loans impossible to make by many borrowers.

The financial system was only rescued from subsequent collapse by a massive government-led bailout, which mostly focused on commercial banks. The then-existing deposit-insurance fund carried out the rescue plan. Initial programmes in the months following devaluation had a twofold aim: to help banks pay foreign obligations and to temporarily capitalise the system. The government took on assets and risky loans made by banks or simply swapped bank loans for promissory notes. A number of debtor programmes were launched, with the last one ending in 2000.

The rescue was led by the Fobaproa, a fund that was controversial, and is now frequently denounced politically by detractors who claim the rescue of the financial system was used to commit fraud and corruption. No bank experienced a run on deposits, despite the severity of the crisis. Essentially, the government provided coverage of all bank liabilities except subordinated debt. The costly rescue (about 20% of GDP) continues to be managed by officials who must still sell off assets. In all, the government only recouped about 20% of book value on absorbed assets. Banks have a 25% loss-sharing agreement with the government on the loans.

Mexican financial and banking regulations were overhauled in 1990s, partly in response to the crisis. In key areas, such as bank accounting and lending practices, the new rules follow US standards.

A wave of acquisitions has left Mexico's financial sector in foreign hands. Their foreign-run affiliates compete with independent financial firms operating as commercial banks, brokerage and securities houses, insurance companies, retirement-fund administrators, mutual funds, and leasing companies. Other important institutions include savings and loans, credit unions, government development banks, 'non-bank banks', bonded warehouses, bonding companies and foreign-exchange firms.

Securities Market

Mexico has a single securities market, the Mexican Stock Exchange (Bolsa Mexicana de Valores, known as the Bolsa). The market has grown steadily, with its main indices increasing by more than 150% in 2003-05. It is Latin America's second largest exchange, after Brazil's. Still, the Bolsa remains relatively small when compared to other North American exchanges. The New York Stock Exchange is about 100 times larger; the Toronto Stock Exchange is six times larger.

The Indice de Precios y Cotizaciones (IPC, the general equities index) is the benchmark stock index on the Bolsa. In 2005 the IPC surged 37.8%, to 17,802.71 from 12,917.88, backed by a stronger Mexican economy and lower interest rates. It continued its steep rise through the beginning of 2006, reaching 19,272.63 points at end-March 2006. The stockmarket also posted a record low vacancy rate, according to the central bank. Local stockmarket capitalisation totalled US$236bn at end-2005, up from US$170bn at end-2004. As of March 2006 there were 135 listed companies, down from 153 a year earlier. Only a handful of the listed companies are foreign. Most are from Mexico City or Monterrey; companies from these two cities compose 67% of the total listed companies.

The IPC consists of a sample of 35 shares weighted according to their market capitalisation. Heavy hitters are America Telecom, the holding company that manages Latin America's largest mobile company, América Móvil; Telefonos de Mexico, Mexico's largest telephone company; Grupo Bimbo, Mexico and Latin America's biggest baker; and Wal-Mart de México, a subsidiary of the US retail giant. The makeup of the IPC is adjusted every six months, with selection aimed at including the most liquid shares in terms of value, volume and number of trades.

Mexico's stockmarket is closely linked to developments in the US. Thus, volatility in the New York and Nasdaq stock exchanges, as well as interest-rate changes and economic expectations in the US, can steer the performance of Mexican equities. This is both because of Mexico's economic dependence on the US and the high volume of trading in Mexican equities through American Depositary Receipts (ADRs). Currently, the decline in the value of the dollar is making non-US markets, including Mexico's, more attractive.

Despite the recent gains, investors remain wary of making placements in second-tier initial public offerings (IPOs). Purchasers of new issues were disappointed after prices fell in numerous medium-sized companies that made offerings in 1996 and 1997. IPO activity in Mexico remains tepid and the market for second-tier IPOs is barely visible. There were three IPOs in 2005.