In its latest World Economic Outlook, the International
Monetary Fund (IMF) this week said the Mexican economy will grow
5.0% in 2010, excluding the impact of inflation. In its
previous estimate, released in July, the IMF had projected Mexican
gross domestic product (GDP) would rise just 4.5% this year.
Unfortunately, the IMF also lowered its forecast for Mexican growth
in 2011. In its new forecast, the organization expects
Mexican GDP to grow just 3.9% next year, versus expected growth of
4.4% in its previous forecast. According to the IMF, slowing
growth in the United States could weigh on Mexico's current
economic boom, which is heavily dependent on exports north of the
border. The IMF also said tighter bank regulation in the
developed countries could crimp credit availability in Mexico,
especially because foreign banks account for more than 80% of all
bank assets in the country. Finally, the organization noted
that enormous amounts of capital are flowing into the Latin
American region as a whole, raising the risk of excessive currency
appreciation and destabilizing debt.
Comment: The IMF's new forecast
is broadly in line with estimates from other organizations.
For example, Finance Minister Cordero said in early summer that
Mexican GDP would likely grow from 4.0% to "slightly"
more than 5.0% in 2010, and central bank chief Carstens said in
late summer that slowing demand from the United States could pull
the 2011 growth rate down to 3.5%. These forecasts all point
to an economy that is growing at an above-average pace. From
1989 to 2009, Mexican GDP grew at an average annual growth rate of
just 2.6%, and in 2009, at the worst of the global recession, it
fell 6.5%. Despite the good growth at present, however,
Mexico's current economic boom is uncomfortably reliant on
exports. While consumer spending is growing, it needs to
accelerate further, and investment needs to start growing
again. Until that happens, Mexico's economy will be
vulnerable to significant slowing.
Patrick Fearon, CFA
Vice President, Fund Management