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.

Labor productivity in Mexico

A lot has been said about the need for a labor reform in Mexico to eliminate structural aspects that has a negative impact on the country’s competitiveness.

Undoubtedly, the legal frame has its effect on competitiveness, as the World Economic Forum’s Global Competitiveness Report 2010-2011 states (“Labor market: the worst weakness for Mexico in terms of productivity”, http://beammx.blogspot.com/2010/10/labor-market-worst-weakness-for-mexico.html).

However, labor market reality is a lot wider and more complex than that. For instance, a great driving force for the recent economic growth has been the manufacturing exports to the United States (automotive sector, fridges, telephone sets), that shows world class skills and expertise. Besides, an unfavorable reality as the low cost of labor, turns into a competitive advantage for attracting investments. According to ProMexico (government office dedicated to the commercial promotion and investment attraction), labor costs in Mexico and China are very similar since 2008 (due to a recent increase of salaries in China, and unfortunately a decrease in Mexico).

These are the advantages, but, which are the factors that reduce competitiveness?:

·         Low quality on education: Mexico is the worst OECD country according to the Program for International Student Assessment (PISA,2006), that evaluates 15-year-olds on 3 areas: science, reading and mathematics. Besides, on World Economic Forum’s Global Competitiveness Report 2010-2011, Mexico is ranked on number 120 out of 139 on quality of the educational system and 128 in the quality of math and science education.

·         Labor regulation: as I mentioned, it do is a factor that has a negative impact on the flexibility for hiring and firing practices, and flexibility for wage determination. There are no perspectives of a short-term reform.

·         Motivation: according to IMSS, at least 4.5 million workers between 20 and 40 years have some kind of depression, created by professional problems, and that reduces their productivity index in 40% (Published by CNN Expansión, September 17^th 2010).

We need to build and keep developing business around these constraints. Decide which actions are the best to improve productivity based on your organization’s particular circumstances and industry. One hint: just don’t manage based on best-sellers.

Virtual Mexico: profile and characteristics

According to different analyses, there are between 27 and 30 million Mexicans, 6 years and older, that use internet for personal and work reasons. This number has been growing at an 18% annual rate, although it had a little deceleration the last year due to the economic crisis.

Source	Internet users
SCT, Yearbook 2008	23.26 millions
Study about availability and use of information technologies at homes 2009, INEGI	27.21 millions older than 6 years
Global Information Technology Report 2009-2010 (with data of 2008), World Economic Forum	21.71 millions
Habits and perceptions of Mexicans about internet 2010, ITESM-World Internet Project	30.24 millions from 12 to 70 years
Statement of Microsoft’s Public Sector Manager, October 2010	Between 28 and 30 Millions
AMPICI, 2009	30.6 millions older than 6 years

There are different estimates about how much time does people surf on the internet (it goes from 11 to 23 hours); but one of the studies shows that Mexican surfers dedicate more time to this activity than to watch TV or listen to radio.

Now that we know the size of the universe and the level of activity, let’s understand the characteristics based on two dimensions: age and socioeconomic level.

Approximately, 75% of Mexican internet users are under 35 years; within this group, those between 12 and 18 are the biggest subgroup. If Mexico has still a young population, the internet population is even younger.

Source	Data
Habits and perceptions of Mexicans about internet 2010, ITESM-World Internet Project	12 a 18 years: 35% 19 a 25 years: 26% 26 a 32 years: 15%
Study about availability and use of information technologies at homes 2009, INEGI	6 a 11 years: 13% 12 a 17 years: 28.3% 18 a 24 years: 20.7% 25 a 34 years: 16%

Now, analyzing the socioeconomic perspective, 37% of internet users belong to the highest levels (A/B/C+), meanwhile between the 15% and 16% are D-, the lowest level. Definitely, a very different reality compared with the country’s general economic distribution.

Source	Data
Habits and perceptions of Mexicans about internet 2010, ITESM-World Internet Project	A-B-C+:37% (59% penetration) C: 22% (40% penetration) D+: 25% (23% penetration) D-: 16% (21% penetration)
AMIPCI, 2009	A-B-C+: 37% C: 19% D+: 29% D-: 15%

These variables let us understand the kind of audience your product or service will be exposed to if you offer it on the internet and are focused on the Mexican market. However, the Mexican internet user still makes very few electronic transactions. There is an estimate that between 7% and 12% of internet users make purchases or payments. These operations are mainly focused on airplane tickets, computers and its accessories.

This number is growing, as well as the confidence regarding the use of electronic transactions; but still, these are a very low number compared with the rest of the commercial activity.

In businesses, there is also a low use of internet for their operations. According to the World Economic Forum’s Global Information Technology Report 2009-2010, Mexico is on number 78 out of 133 countries regarding the extent of internet use for business activities.

This is the virtual Mexico that you need to know in order to align your business and commercial actions for serving in the most effective way this parallel country.

Consumer confidence is improving... but beware!

The Consumer Confidence Index, published by INEGI, has already a year with a growth trend. As in other analysis I have shared, these are good news, but let’s give it a little context.

The good news started by the end of 2008, beginning of 2009, when people felt that the economic situation at home and in the country was worse than a year before, but they also thought that it would improve in the following 12 months; this means people began to see the light at the end of the tunnel.

Later, by the end of 2009, people began to feel that the economic situation was already better than the previous year, at home as well as in the country; this increased consumer confidence.

However, there is another indicator within the index, that gives a different nuance: when people is asked about the chances to buy durable goods (home appliances, furniture, etc.), they show a lot more cautious attitude. In other words, people has each time more confidence on the economic situation, but not as much as to make big purchases. The result is that, although the positive trend, the confidence index is on its lowest levels of the last 10 years.

How has this confidence affected economic activity? Data shows that retail sales have almost reached the same level they had at the beginning of 2008, but with very uneven results. For example, there are sectors with sales levels superior to 2008:

·         Food, beverages and tobacco

·         Supermarkets and department stores

·         Textile products, dressing accessories and footwear

·         Health-care products

But, on the other hand, there are sectors that are below 2008 levels:

·         Stationery, recreation products and other personal-use products

·         Furniture, household equipment, computers and interior decoration articles: this sector is in the lowest levels of the last 10 years!

·         Hardware articles and glass

·         Motor vehicles, spare parts, fuel and lubricants

To summarize, consumers' reactivation is focused on sectors that cover basic needs (health, food, dressing), but the employment situation (analyzed previously, on http://beammx.blogspot.com/2010/11/employment-in-mexico-improvements-but.html) shows a weak market for durable goods. If your company or employment is on this sector, I suggest one of three ways:

1.       Adapt your offer to make it more affordable (financing, designs to make it cheaper without losing quality, etc.)

2.       Find specific niche markets that may have attractive dynamics

3.       Look outside domestic markets. A possibility is to think about emerging markets, with growth forecasts beyond 5%, and take advantage of trade agreements Mexico may have with them.

Mexico’s GDP forecasts: threats and opportunities, wishes and realities

Mexico is recovering from its worst economic setback in the last 80 years. After a GDP decrease of 6.5% in 2009, the most recent forecasts estimate  a 5% increase for 2010. This forecast has been increased during the 2^nd semester of 2010, and shows the thrust received by exports to the United States.

This growth allows reaching, by the end of 2010 or beginning of 2011, the same GDP that Mexico had on 2008 first quarter (at constant currency); it means that the crises caused the loss of 3 years of economic activity! And regarding GDP per capita, it will recover around 2013 according to World Bank’s statistics.

The economic sectors with more growth in the last year have been commerce, manufacturing, educational services, and lodging, food and beverages services. However, neither has reached 2008 levels.

On the other hand, there are sectors still shrinking in the last year, such as construction, professional, scientific and technical services, and health and social assistance services.

The only sector that did not have any contraction on these two and a half years was information on media, which comprises printed and electronic media.

What are the expectations for 2011? For the World,  as well as for Latin America, projections are that there will be a growth, but slower than 2010. For Mexico, the most recent forecasts are between 3.5% and 3.9%. The forecasts have been decreased during the year, mainly because the expectations for an economy expansion in the United States have been reduced (they are now between 2.3% and 2.6%).

These projections present a scenario with caution and risks for the next year. Mexico will keep a great dependence on United States’ recovery, and the growth rate will make employment and income recoveries something that won’t happen before 2 to 3 years. But there will also be economic sectors with very interesting growth rates, so it will be important to keep a tracking of the environment to identify these opportunities.  

Employment in Mexico: improvements, but still a long way to go

During October we had the official statement that employment is at an all-time high, and obviously, that the jobs lost by the financial crisis were already recovered.

Both facts are true according by the figures given by Social Security (IMSS) and by INEGI’s employment national survey. This situation reflects the economic recovery we have lived on the last quarters.

However, there is a part that is not mentioned: population growth. The rhythm of employment creation is less than the increase of population, and although the employment level of 2007 has been recovered, there are more than 3 million Mexicans that have entered the group of potential workers (14 years or more) on the last two years and a half.

What does this unbalance between new jobs and population growth means? According to INEGI’s figures:

1.       To have 2.5 million Mexicans unemployed

2.       To have more than 5.5 million Mexicans that do not look for job because they think they don’t have a chance! With the waste of talent and social risks this attitude implies.

3.       To have 4 million Mexicans with an occupation, but willing or needing to offer more working hours (sub-employment)

4.       To have almost 13 million working in the informal economy, with all the consequences it implies to national economy.

5.       To have an average of lower income than two years ago (occupied population that earns less than 2 minimum wages passed from 42% to 46% on the last two years and a half).

What are the consequences?

·         A weak domestic market. The economic growth has been mainly by exports to United States, and although retail sales have increased in this year, it has not been enough to recover last year’s fall.

·         Social risks. The famous “demographic bonus” is turning into an important social risk due to the number of young people without employment opportunities.

·         The opportunity to find unemployed talent. Within the unemployed, there are 834,000 mexicans with high school or tertiary education. This is one of the highest concentrations of unemployed people with this profile on the last 10 years.

I don’t mean to be pessimistic. I want to offer a complete view of the risks and opportunities in the labor market, so you can analyze how they will affect your organization.

If you are selling to businesses, do you know the potential size of your market?

In September, INEGI published the final results for 2009 Economic Census. This shows us the total number and characteristics of the economic units in the country (organizations, businesses or entities with one kind of permanent activity, with profit or non-profit purposes).

The following analysis considers the economic units (EU) that:

·         Had activity the whole 2008.

·         Were considered for the census by direct counting (in rural zones, EU were considered by sampling).

·         Belong to private sector and “paraestatales” (those that offer public services but are not part of public administration).

The total of EU of with this profile is 3,724,019. These EU bought almost $6 trillion pesos in services and products for the development of their activities.

Now that we know the size of the market, let’s understand how it is distributed. We will analyze it by three perspectives: location, economic activity, and size.

Considering location, the six first places are:

·         Distrito Federal (Mexico City), which concentrates the 17% of the total consumption of goods and services for EU.

·         Nuevo León, with 9.4%

·         Estado de México, with 9%

·         Veracruz, with 5.7%

·         Jalisco, 5.4%

·         Coahuila, 5.1%

These 6 states concentrate half of the total purchases made by EU for their activities.

Now, if we analyze from the economic activity perspective, the most dominant sector is manufacturing, with 57% of the total consumption of goods and services. Within this sector, the main economic branches are transportation equipment, chemical industry, and production of oil and carbon products, representing almost the half of the sector.

Now, considering the last perspective, the size of the EU, 95% of them have less than 10 people! On the other hand, only 0.2% has more than 250 people, but they represent 66% of the total consumption of goods and services.

Undoubtedly, if you can assess the size of the total “business cake” that you have for an activity or a region, as well as understand the characteristics of the businesses or organizations and their level of concentration, you will be able to make more efficient decisions to exploit your current competitive position and to discover new horizons and opportunities. So… of this “cake” of $6 trillion pesos, ¿how big can your chunk be?

North and South: two competitiveness realities for Mexico

As I mentioned on my previous analysis, Mexico has big contrasts on its global competitiveness, with some areas on the first places and other on the last ones.

This contrast is also present within Mexico, where there are states a lot more competitive than others.

The Mexican Institute for Competitiveness (IMCO) published on September the State Competitiveness Index 2010, where the 32 federal entities are evaluated on 10 subindexes, measured by 120 variables. The results published reflect data of 2008.

These are some of the most important results of the report:

·         The three most competitive states, and therefore the ones with more capacity to attract and retain investments and talent, are Distrito Federal (Mexico City), Nuevo León and Querétaro. This states also occupied these positions in 2006. Surely, due to the recent security issues in Nuevo León, it would be affected on the ranking, but not as much as to leave the first places due to the big difference between these ones and the last ones.

·         The three worst states are Chiapas, Guerrero and Oaxaca. Chiapas went down 3 places since 2006; the other two were already on the last 2 places.

·         The most competitive states have these strengths:

o   World-class enterprises

o   More patents per population

o   Less rates of illiteracy, better education quality, and a population with more years of education

o   Governments with more fiscal autonomy

·         The main weaknesses of the less competitive states are:

o   Low level of environment sustainability

o   Not enough distribution of drinkable water

o   High illiteracy, low education quality, population with few years of education, low computer access, etc.

o   Low labor productivity, low negotiation capacity between unions and enterprises, low automation in agriculture, modest investment for housing

·         The states that improved more in this two years are Sinaloa (from 18^th to 10^th) and Tamaulipas (from 12^th to 8^th)

·         The states that lost more positions in the rank are Nayarit (16^th to 23^rd) and Quintana Roo (from 9^th to 13^th)

These results show clearly the existence of two Mexicos: a more competitive north (almost all the border states are on the first 10 places), a south with weaknesses, and the center with high contrasts (you can see the map at the end of this blog). This has produced a GDP per capita that is the double on the 5 more competitive states compared with the 5 less competitive, according to IMCO. There are no signs that show a closing of these gaps, so the businesses will have to deal with this double reality in the country.

Labor market: the worst weakness for Mexico in terms of productivity

I talked last week about Mexico’s strengths according to the World Economic Forum’s Global Competitiveness Report. Now I will focus on Mexico’s weaknesses, based on two criteria: the areas where Mexico has the worst rankings, and the areas where it lost more positions in the ranking.

Mexico’s worst areas are:

·         “Labor market efficiency”, where Mexico is the number 120 out of 139 countries. The worst rankings in this area are for hiring and firing practices highly impeded by regulations, a low reliance on professional management (senior management positions usually hold by relatives or friends without merits, more than professional managers), and a low female participation in labor force.

·         “Institutions”, occupying the 106^th place. This area refers to the legal, ethical and administrative environment where the organizations’ economic activity and their relationships with the government are developed. The result is due to really bad positions (on the last 10 places) for matters related with security (significance costs on businesses imposed by crime and violence, cost impact of organized crime, and a low reliability of police services), a high burden of government regulation and a low efficacy of corporate boards.

The area where Mexico had the biggest fall is “Financial market development”, going from place 73 to 96. This fall was due to a worsening for the regulation and supervision of securities exchanges, and a bad grade on the provision of financial services at affordable prices (this was scored for first time on this year).

These are also the weak areas when compared with the other 22 Latin America and Caribbean countries evaluated, having the places 17, 15 and 14 respectively.

As a summary, the negative results are consequence of three aspects: the increase on insecurity, the lack of structural reforms (labor, fiscal and political regulation), and the need of a more professional management on businesses. The legislative agenda shows no signs of major changes on the short term for these structural areas, so improvements will have to rely on a more professional way to manage businesses on the country.

Macroeconomic environment and market size are Mexico’s main strengths for competitiveness

Mexico lost 6 positions on the Global Competitiveness Report, moving down from place 60 to 66 (out of 139 countries evaluated). This result was produced by a fall on the ranking on 10 of the 12 areas evaluated by the World Economic Forum for this report.

Although the general results have a negative trend, there are two areas where Mexico remains on good positions:
• “Market size”, which considers domestic and exports markets. The rationale for the evaluation of this area according to the Report is that “…the size of the market affects productivity since large markets allow firms to exploit economies of scale…”. Mexico is on number 12 according to the size of its domestic market since Mexico is the 11th most populated country within the 139 evaluated, and is the number 15 based on the value of exports of goods and services (supported mainly by the volume of exports to USA).

• "Macroeconomic environment”, Mexico has had an improvement of 21 places on the last 2 years, mainly driven by positive results on the government budget balance, although it had a setback on inflation. Mexico ranks now on number 27.

The first area is attractive in terms of the potential business volume in the region, since Mexico is the 2nd biggest market in Latin America, and USA’s 2nd commercial partner.

The second area is particularly attractive considering all the recent economic turmoil, especially the one related to public debt, where Portugal, Ireland, Greece and Spain have been creating unsettlement for the last four months. Mexico has the 2nd best macroeconomic environment in Latin America.

On a next article, I will talk about the weak areas to have a balanced picture of structural conditions for productivity in Mexico.