The Globalization Index of Mexico

Article published in Plaza de Armas (www.plazadearmas.com.mx), April 18th, 2011

The Economy Research Center of the Swiss Federal Institute of Technology in Zurich, the best university in Switzerland and the 23rd place in the world according to the 2010 Academic Ranking of World Universities (one of the most prestigious ranks), started in 2002 the publication of the Index of Globalization, with the purpose to evaluate the way in which each country creates connections and interdependence networks with other countries through the flow of people, information, ideas, capital and goods.

The Index is calculated from a model developed by economist Axel Dreher, through which he identified how globalization, particularly the one related with capitals, goods and services, influences in the economic growth of a country.

The Index evaluates 23 variables divided in three groups: economic, social and political globalizations. The first group evaluates the flows of money and the existing restrictions for commercial exchange with other countries. The second group considers the contact with people in other countries, as well as the easiness to be exposed to ideas, information and influences of foreign cultures. The third group evaluates the creation of political relationships with other countries and the participation in international organizations and agreements.

Although the Index began to be published in 2002, it evaluates information since 1970. The evaluation published this year is made with data from 2008.

The results indicate that Belgium is the most globalized country, and it has been for the last 5 years. Let’s remember that Brussels is the seat of the European Government, and Europe is the most globalized region, so the result sounds natural.

Mexico has improved its grade in a 50% from 1970 to 2008; however, we have done it slower than other countries. In 1970, we were on 43^rd place out of 172 countries, but in 2008 we were in the 75^th place out of 186, a loss of 32 places that made us go from the top 25% of the list to a place each time closer to half of the table.

To avoid an evaluation of almost 40 years, let’s center the analysis in the last 4 years. The country was in place 64 in 2005, but in the last 3 years we fell to place 75. This fall was caused by the loss of places in the three groups evaluated.

Globalization	2004 rank	2008 rank
Economic	76	89
Social	81	91
Political	74	87

It may sound weird that in the rankings of each group we are lower than in the general rank. This happens due to the behavior of other countries: there is a group of countries consistently in the first 20 places in each group, but there are a lot of countries that have a very good rank in one group, and bad rankings in the other two (for example, within the first 40 countries in one group, but below place 100 in the rest). The fact that Mexico has very similar rankings in the three groups makes us go up in the general rank, but that is not precisely a consolation.

In Latin America, there are 34 countries evaluated. Mexico is in place 11. The most globalized country in the region is Chile.

Something interesting to observe is that Latin America has its worst results in the social globalization, where the country with the best classification is in place 44. This indicates that we still have many connections to develop to facilitate cultural exchanges and personal contacts with other countries. In the case of Mexico, let’s remember a data I mentioned three weeks ago, when I mentioned that approximately 0.9% of the population that lives here was born in other country. OECD estimates this variable is 0.5%; in either case, we are the country with the lowest value in this indicator out of the 34 countries in OECD, and this surely creates our low socialization index.

Made by Atalaya with data from the KOF Index of Globalization

It is common to get lost in the daily discussions between the official figures that show progresses and the attacks, with reason or without it that discredits the progresses. However, a parameter we must never lose of sight is the magnitude of such progresses compared with those in other countries, since that will allow us to have a better understanding in a wider panorama. For the moment, it appears that we are not taking advantage of the trade agreements we have with more than 40 countries; we need to reduce the restrictions for international commerce and increase proportionally to our economy the international flows of money, goods and services. If we don’t do it, we will compromise the economic growth we need to revert the historical backward movements we have had.

Cautious optimism-Inflation perspectives in Mexico

Published in Plaza de Armas (www.plazadearmas.com.mx), April 11th 2011

The last week we had two encouraging news for the national economy. The first one was the increase in the economy growth estimates for 2011 from 4.0% to 4.3%, announced by Hacienda (the Treasury Department in Mexico). The other one was that the annual inflation in March was 3.04%, the lowest in the last 5 years.

However, we also had statements from the Head of the Mexican Central Bank, within the National Bank Convention, where he said that we must take the optimism with caution in the presence of “not comfortable” conditions in the external environment. Let’s review this information to understand its causes and its implications.

The increase in the growth perspective is based in internal and external results. The Global Economic Activity Index, which works as an early GDP index, has a growing trend. We have also growths in non-oil exports, in internal demand, and in the US economy, as I mentioned last week. It is true that growth will be less than the one we had last year, but last year’s growth was result of the dramatic fall we had in 2009. So far, optimism seems sustained in hard data.

News about inflation has different explanations. The data publicly announced is based in the National Consumer Prices Index, comparing it with the value it had 12 months earlier. Mexican Central Bank explains it is the result of a price decrease in some fruits and vegetables, mobile phones and cars, mixed with an increase in tortilla, gasoline, avocado and electricity. Here we begin to find some of the not comfortable circumstances referred by Dr. Agustin Carstens, which we will detail a little ahead. I just want to make two observations about national inflation: first, March 2011 had the lowest inflation rate in the last 9 months, and it matched with the fact that inflation in March 2010, the other reference point to estimate the most recent annual inflation value, was the 5th highest month in the last four and a half years; so, the fall in inflation is the result of a decrease in monthly inflation as well as a high reference point. The other observation I want to make is that the other component for inflation, the National Producer Prices Index, had in March a 4.11% annual inflation, the second highest level in the last year and a half. It is not sustainable in the medium term a situation where consumer prices go down while producer prices increase; this will bring inflationary pressures in the short term. Therefore, this other component of optimism has a lot of nuances, national and internationally.

So, let’s talk about the other international factors. We have a world inflationary pressure due to two factors: the increase in food prices (especially grains) and the increase in oil. Food prices have had increases for the last 8 months, in some cases as steep as the increase of 65% in the last 4 months for corn. Rice and wheat have had also important increases. Fortunately, UN’s Food and Agriculture Organization announced a price decrease in March that they qualify as a “truce” since there are still many factors that keep uncertainty about future food prices. Cereal international stocks are in historical low levels, and although crops perspectives are positive for 2011, won’t be enough to replace stocks. That gives us expectations of high prices for 2011-2012. If we see the quotes for different grain futures, corn projections are an increase up to July with a later decrease, meanwhile wheat and rice keep their increasing perspectives up to May 2012. Evidently, besides inflationary prices we have very important social risks since we are talking about very basic food produces world wide, and a lack of them would have very strong consequences. In Mexico we have seen a notorious increase in tortilla price in the last months, with a 50% increase in December, and an increase of 6% during this year’s first quarter.  Although there are different support programs, it is difficult to foresee a price reduction in the short term. This is another inflationary pressure that began to reflect in March.

The oil price will keep its growing trend, particularly with all the political and social instability that we have had since January in North Africa and Middle East. All this has created a world scenario where many countries have begun to increase their interest rates to control their inflationary pressures. For example, the European Central Bank announced last Thursday an increase of a quarter of point to leave its rate at 1.25%, since they want to reduce their inflation from 2.5% to 2%. This is the first adjustment they make since 2008. China also made a 4th adjustment in 6 months since their inflation is 4.9%, while their goal is 4%. Other countries that have increased their interest rates in March are Chile, Brazil, Colombia, Uruguay, South Korea and India among others. This may accomplish its purpose to control inflation, but a “side effect” is to compromise the economic growth rate; so we are beginning to live a delicate balance in the world.

Mexico keeps estimating they will review next year its interest rate since authorities consider that the level of economic growth has not been enough to create an overheating; I estimate that all the external factors may lead to a review during the second semester of this year, and possibly a review in the inflation estimates that is 3% +/- 1%. It will also be necessary to monitor if there are changes in the current world economic growth dynamic produced by the increase in interest rates.

Tourism and insecurity, where are we standing?

Published in Plaza de Armas, newspaper from Queretaro, March 7^th 2011

During the recent weeks, a lot has been said about the numbers announced by the Ministry of Tourism referring to the increase on international tourism in the country during 2010. There is a lot of incredulity because there are many cities where the arrival of tourists has dramatically decreased due to insecurity problems.

Are the numbers unreal? Let’s analyze the situation of this important sector that represents 9% of the country’s GDP and more than 2 million direct jobs.

First, a clarification of terms. International travelers are foreign people that get into the country, no matter if they stay for a few hours or if they stay the night. Mexican Central Bank (BANXICO) records all those visits, meanwhile Tourism focuses only on the people that stay the night in the country, since they receive the definition of tourists.

This difference is important, especially on the borders where there is a very important flow of travelers that don’t stay the night, and therefore, they are not tourists.

BANXICO reports a fall in the total number of travelers in 2010, precisely because the border travelers that don’t stay the night had a significant decrease (7.8 million less than in 2009).

The groups considered as tourists (border travelers that stay the night and those that get beyond the borders) increased from 21.5 to 22.4 million. This confirms the increasing trend announced by Tourism, with a little different numbers (Tourism announced that they were 22.6 million). A 4.4% increase will always be good news, but we are just reaching 2008 levels.

Then, how is insecurity affecting tourism? Let’s see some data that can give us more clarity.

First result: world tourism increased 6.7% in 2010. Mexico is growing slower, therefore we had a relative decrease that makes us stay with a smaller piece of the world pie.

Second result: the country stopped receiving $230 million dollars on the border zone this year due to the fall of travelers. Besides, many hotels on different cities on the north zone reported occupancy levels of 40% during 2010, against 70% in 2009.

Third result: 3 cruises lines recently announced a reduction or elimination of their travels to Mexico. This sector, classified also as travelers and not as tourists, had an increase in 2010 and represents 8% of international travelers and 5% of foreign currency inflows.

Fourth result: United States, that represents 40% of foreign tourism in Mexico, has traveling alerts for half of the country’s states. This is a big red alert (fortunately, Queretaro is not on that list).

Are there good news? Yes. For instance, foreign currency inflows increased 5% in 2010 (every traveler and tourist spent more money on average). Also, the big national centers for international tourism (Cancun, Mayan Riviera, Cabos) are still outside the alert zones for the United States.

Although the perspectives were positive at the end of 2010, we can’t overlook current risks. We still may have an increase in the number of tourist in 2011 as a consequence of the world dynamic in this sector, but if we don’t have positive changes in the short term, the growing rate will be lower again, and tourists will concentrate more in a few destinations, that are already the ones more visited, at expense of the rest of the country.

	2007	2008	2009	2010	2011 (estimated on Dec. 2010)
International tourists (million)	21.4	22.6	21.5	22.4	22.6 Tourist National Confederation
					26.0 Ministry of Tourism

2007 to 2010 are data from BANXICO

A follow-up on Mexican consumer behavior

Extract of the article published on Plaza de Armas (http://www.plazadearmas.com.mx/), February 28^th 2011.

 This is a follow-up of my post published on November 16^th 2010.

At December 2010, retail sales had a 2.9% annual increase. The good news are that all the areas evaluated had an improvement during the year; the bad news are the existing gaps in different areas compared with 2008.

Dec. 2010 vs. June 2008 (Made with data from the Commercial establishments monthly survey, INEGI)
Retail establishments with growth		Retail establishments with decrease
Establishments	Change	Establishments	Change
Food, beverages and tobacco	13.8%	Home appliances, computers and articles for interiors decoration	-18.1%
Textile products, dressing accessories and footwear	6.9%	Motor vehicles, spare parts, fuel and lubricants	-11.6%
Supermarkets and department stores	4.6%	Stationery, recreation products and other personal-use products	-4.4%
Hardware and glass	1.7%	Health-care products	-4.1%

Although data shows improvement, consumers are still very sensitive to prices on their purchases. According to a study published by American Express, 68% of Mexicans make our purchases based on the cost (more than quality, and a lot more than the ecological impact of the products). This behavior is clearly identified by the big supermarket chains, as Walmart or Soriana, that are growing based on their low-investment and low-cost establishments (Bodega Aurrera Express, and Soriana Express).

The factor that Is having a clear influence on this behavior is employment. The national unemployment rate has been at levels of 4.9% to 5.7% on the last 6 months, way above the 2008 levels.

What is the outlook for 2011? There are three indicators that show a positive trend:

1. There are positive estimates of private consumption (where the families’ expense is included) according to International Monetary Fund (+4.7%) and Banco Santander (4.1%); that means it will be one of the motors for the estimated national economy growth.
2. Credit to consumers has had recently its biggest monthly increases in the last 3 years according to Central Bank (BANXICO) and the Banks and Securities National Commission (CNBV).
3. Consumer confidence is positive for 2011. TNS Research International identified in a recent study that optimism levels and intention to consume have increased for 2011. The confidence index calculated by INEGI had in January 2011 its second biggest level in the last 32 months, with good levels for those components that consider the economic perspectives for the next 12 months.

What are the risks? In the first instance, there are current inflationary pressures due to the increase on several commodities; the second risk is the slow rate in employment recovery we are having. Both issues can affect negatively the consumer’s behavior.

In brief, consumers begin to have more confidence and marginally more capacity to consume, what gives moderate growth perspectives with some uncertainties. Meanwhile, cost will be still an important factor in the purchasing decisions, so you will have to develop initiatives to reduce the cost of your product or service without compromising the basic quality elements that keep you competitive.

2011 Mexico's economic outlook

As natural on this period of the year, it is important to take a peek to the economic forecasts for the next year. I will analyze it considering three macroeconomic variables: GDP, inflation and exchange rate.

1.       GDP: as I mentioned on my note “Mexico’s GDP forecasts: threats and opportunities, wishes and realities” (http://beammx.blogspot.com/2010/11/mexicos-gdp-forecasts-threats-and.html), perspectives for the next year were between 3.5% and 3.9% in November. This forecast, lower than the results for 2010, is very influenced by the forecasts of USA’s economy. Since I published that note, the result for America’s economy on the third quarter of the year has exceeded expectations, and that may bring an increase on Mexico’s projections (private analysts consulted by Mexico’s Central Bank, BANXICO, increased on December their estimate to 3.59%), although there have been other voices, more conservative (a researcher from Tecnológico de Monterrey estimates an increase of 2.5%, and Moody’s estimates it will be between 3% and 3.5%).

2.       Inflation: on November, this is 4.32% according to BANXICO (compared with November 2009). Although it has increased on the second semester due to changes on agricultural produces and on electricity, BANXICO and analysts’ perspectives are a decrease for inflation (BANXICO estimates it will be 3% +/-1% for 2011 3^rd quarter, and International Monetary Fund estimated it will be 3%). Although the private analysts consulted by BANXICO made a recent adjustment to increase it (from 3.77% to 3.82%), it generally seems that the weak domestic market (“Employment in Mexico: improvements, but still a long way to go”, http://beammx.blogspot.com/2010/11/employment-in-mexico-improvements-but.html) won’t put inflationary pressures to the national economy.

3.       Exchange rate: since February 2010, it has been practically all the time on the range of 12.30 to 13.00 pesos per dollar, and the perspectives are it will keep that way. This outlook represents stability, but may compromise exports competitiveness.

So far, the projections sounds encouraging: PIB projections have been slightly increased (with some warning voices), inflation appears to be less than this year (with some recent increases), and the exchange rate seems to be relatively stable. It looks like a positive scenario, but not extremely optimistic. There are several world issues that must be closely followed since they may have a significant impact on these indicators:

·         The magnitude of America and some European countries governments’ debt.

·         The risk of “overheating” of some emerging economies, as China and Brazil.

·         Different governments decisions regarding their currencies in order to stimulate their international trade.

Plan over positive scenarios (if you are too conservative, other will take the opportunities that will arise), but let’s have clear that the country won’t recover 100% in all its sectors during 2011, and there are different economic issues showing a fragile world, so it will be convenient to be prudent and continuously monitor the variables mentioned above to timely identify possible changes in trends.