Mexico Business Blog

As 2009 draws to a close, Mexico, like many countries, will be happy to see the back of this year.  Not only did 2009 see the worst economic decline in decades, but the steep recession was exacerbated by the outbreak of the H1N1 flu in April, which had a devastating effect on tourism and, to a lesser degree, business travel.  Mexico’s deep economic integration with the United States is a key motor for the economy, and as a result, the contraction of demand for vehicles and other durable goods in the U.S.A. hit Mexico’s productive sector hard.  The first two quarters of the year were practically catastrophic, as the precipitous dropoff in demand for vehicles led to layoffs and temporary plant closings in Mexico’s large vehicle manufacturing industry.  Tourism, hit by the one-two punch of the slumping U.S. economy and then the flu outbreak in April, is showing tepid signs of recovery, but the sector is still expected to close the year approximately 20% below 2008 levels.

The good news is that for the moment, the worst appears to have passed.  While the economy is by no means charging back, it did register positive GDP growth in the third quarter, following four straight quarters of contraction.  The damage is done, however, and central bank Banco de Mexico is projecting overall GDP growth for 2009 at approximately -7.0%.  The effect on employment has been devastating, with manufacturing chamber Coparmex estimating that some 600,000 jobs were lost during the year.  Inflation was held relatively stable at approximately 4%, although this is projected to rise in 2010 presuming a rebound in internal markets.  Mexico’s currency has hit a volatile patch at year end.  The peso depreciated from about 13.2 to a high of 15.5 in March, before stabilizing at around 13.5 for most of the year.  The dollar suddenly dived against the peso in the last week of November, reaching as low as 12.3 before creeping back up to about 12.9 at the time of this report.

Economic analysts in local media seem to be trying to will the economy back to life, and some small gains are being registered, such as department store sales in the third quarter and new jobs in certain manufacturing sectors.  A stronger recovery, however, will have to overcome some formidable obstacles.  Facing a growing budget deficit, the Mexican government recently passed a 2010 economic package that includes a raft of tax increases on items such as income and retail sales.  This, taken together with proposed hikes in Mexico City on hotel occupancy and public transportation, won’t help domestic consumers loosen the purse strings.  Credit to consumers and businesses has been extremely tight this year, with no apparent trend toward loosening on the horizon.  Ultimately, however, the biggest factor in Mexico’s economy will be the pace of recovery in the United States.  With over 80% of the country’s exports going to the United States, consumption in Mexico’s northern neighbor will have a major impact on job creation and in turn the reactivation of the domestic market.

While the story of 2009 is undoubtedly the deep recession, some sectors in Mexico have done remarkably well, and are actually thriving despite current economic conditions.  One such sector is aerospace.  Mexico has become a world-class player in this industry over the past decade, drawing over US$32 billion in aerospace manufacturing investment since 1990.   The number of companies in aerospace manufacturing, maintenance and related support services in Mexico has grown from 61 to 194 over the past four years, and export sales are projected at US$3.4 billion for 2009.

While aviation itself overall slumped in 2009 along with the economy, one subsector has become a growth industry: Private air transport for executives.  This niche is set to buck the trend and post positive growth for the year, with sector leader Aerolineas Ejecutivas (ALE) projecting 12% growth for 2009.

Mexico’s energy industry has long been restricted exclusively to the state, but steps taken in recent years have allowed increasing opportunities for participation by the private sector.  Changes in public policy combined with the global surge in interest in alternative energy sources have made this sector a focus of investment in Mexico.  On the electricity side, major wind generation plants are in development or construction in the southern Isthmus of Tehuantepec region and along Mexico’s northern border with California.  Solar equipment manufacturing and power generation has received considerable attention as well.  Japanese manufacturer Kyocera opened up a second major plant in Tijuana this year to produce solar modules, and the state of Durango presented a proposal to construct a “solar cluster” industrial site to host both equipment manufacturers and solar electricity generation plants.  Biofuels are also drawing interest in Mexico, with research and development underway on fuels produced from materials such as jatropha, sugar cane, corn, palm oil and tallow, among others.

Another industry that has thrived in Mexico despite the recession is software development.  Anchored in the city of Guadalajara and surrounding state of Jalisco, Mexican software engineers both develop their own software and provide “nearshoring” code writing services to software companies in California and elsewhere.  Jalisco boasts over 200 information technology companies, and national IT organizations are projecting 11% growth for the sector in 2009 at a time when most other industries are facing contraction for the year.

For U.S. food and food ingredients exporters, Mexico continues to represent a market of interest.  The national farmers’ confederation (CNC) reported this year that Mexico’s dependency on imported food products is growing, particularly in corn and oilseed products. In 2008 Mexico imported 9.1 million tons of corn and 4.0 million tons of oil seeds.  Corn and oil seed imports are expected to increase by 10% in 2009 due to losses in domestic production caused by a drought earlier in the planting season.

On balance, Mexico heads into 2010 facing enormous challenges, but not without cards to play.  The drug wars continue to consume a significant share of public resources, but ultimately reactivation of internal and export markets will have to drive the recovery.  If the United States is able to accomplish even moderate economic recovery in the coming year, the resulting boost to Mexican manufacturing should provide an important push toward reverting 2009’s downward trend in employment and consumer spending.  And this, in turn, can only benefit trading partners seeking to export industrial technology and consumer goods to Mexico.

Tags: 2010, Economy, Energy, Manufacturing, nearshoring, outlook, solar, wind