MexECON Blog

Why Mexico?

At Terra Nova, we have great confidence in Mexico and our Mexican partners.  One key reason is that Mexican economic policy has improved significantly in recent decades, as policymakers sought to boost growth and avoid the boom-bust cycles of Mexico's past.  The country has opened up to foreign trade and investment through initiatives such as the North American Free Trade Agreement (NAFTA) and a more recent trade pact with Japan.  The Bank of Mexico has become a committed inflation fighter, and the government has until recently balanced its budget in spite of entrenched political interests that have historically capped revenues at some 25% of gross domestic product (GDP), versus historical averages of almost 30% in the United States and more than 50% in many other developed countries.  Finally, regulation is reasonable in many sectors of the Mexican economy, creating a very inviting investment climate.

Because Mexico has tied itself so closely to U.S. trade and investment, it suffered greatly from the recent U.S. recession.  Based on official figures, Mexican GDP dropped 6.5% in 2009, marking the economy's worst year since at least the 1930s.  Nevertheless, even the problems caused by the recession illustrate how Terra Nova is rightly focused on Mexico as an investment target.  For instance, the Mexican economy has rebounded surprisingly well since 2009, in large part because of strong exports.  Also, the sharp slowdown in the Mexican economy dramatically weakened the Mexican peso, though the currency has partially recovered.  Even with the partial recovery in the peso, Terra Nova's available capital should therefore go a lot farther in Mexico.  With the lower peso and potential funding from Terra Nova, our Mexican partners should also be able to find enhanced export possibilities.

With regards to Terra Nova's focus on agriculture, the picture is particularly attractive, not only because of Mexico's own initiatives, but also because of trends in the United States.  One such trend is that increased industrial and residential development has reduced the amount of U.S. land that can be economically used for crop production.  Of course, U.S. land prices have cooled off amidst the recession, but they remain historically high, and once the real estate market recovers, land owners will again be tempted to convert crop land to residential and commercial uses.  Another important U.S. trend is that drought and tightened environmental restrictions have reduced the amount of water that is available for agriculture.  That is especially true in California, which is probably the state that most directly competes with Mexico for agricultural production.  Hundreds of thousands of acres in California alone are reportedly out of production because of a lack of water.  Finally, tougher enforcement of immigration laws has made it more difficult for U.S. farming operations to find low-cost workers.  In contrast, many parts of Mexico have fertile, inexpensive land available with ample water supplies and large numbers of workers in the vicinity.  These trends are likely to make Mexico more and more attractive as a food production base for the United States, and with Terra Nova's capital and expertise, our Mexican partners are likely to find great new opportunities in this arena.

Patrick Fearon, CFA
Vice President, Fund Management

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