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CANNING HOUSE EDITION latin american economy & business January 2014 - EB-14-01 ISSN 0960-8702 C O N T E N T S Will Mexico be the good news SPECIAL FOCUS 3 Region 3 story of 2014? Arrival of the metal-smuggling cartels? China and Latin America 5 After a very good December – marked by the congressional approval of More opportunity than threat in President Enrique Peña Nieto’s landmark energy reform legislation – 2014 Mexico is now the country all investors are talking about. Many argue that ECONOMIC REVIEW 10 it is set for a stellar year in 2014, with an economic recovery gathering pace Argentina 10 and an investment surge shaping up. We believe the secret to under - On the road to ruin – or stumbling standing this important economy may involve disentangling two separate to the finish line in 2015 – but connected – ‘Mexico stories’. One is a long-term story about the Colombia 13 successes – and failures – of attempts to make the economy more competi - Drummond pulled up again tive. The other is a shorter term, more cyclical story of the management of Region 14 the country’s business cycle. How do they relate? Mercosur faces difficult decisions BUSINESS FOCUS 17 The long-term Mexican story has recently been at the centre of attention for Peru 17 two reasons. First, after a year of political uncertainties and opposition A media war in the making? demonstrations, when the reform plans of the new government often Brazil 18 appeared to be blocked on all sides and to hang in the political balance, the The limits of pre-paid administration achieved a December breakthrough. After earlier measures Power 20 reforming education, banking, telecommunications, the fiscal and tax Argentina: after the blackouts system, and the regulation of election campaigns, the government in December achieved what for many was unthinkable – congressional MARKET REVIEW 22 approval of a new regulatory framework allowing state oil company Region 22 Petróleos Mexicanos (Pemex) to strike a range of deals designed to attract The mild bear market of 2013 investment by the international oil majors. Supporters of this approach say an inflow of new money and expertise into the oil and gas sector will allow the country to reverse the 10-year decline in Pemex oil production. When the fiscal reform is fully implemented, the government too will be less dependent on the oil sector for its revenue. Factoring in the shale oil and gas boom going on in the US, and Mexico’s own very large shale reserves, the net result, they say, is that the country may be on the threshold of an era of cheap energy, which is likely to make it much more competitive. There is a second reason for this long-term optimism. In January, the North American Free Trade Agreement (Nafta) turned 20 years old. The record on Nafta over the past two decades is mixed. It has clearly boosted Mexican trade with the US and Canada, and helped open up the economy, but it has This edition of Latin American done notably less to reduce domestic income inequalities in Mexico. Economy & Business has been produced for Canning Unlike Brazil and a number of other countries in the region, Mexico cannot House Corporate Members claim to have lifted a large section of the population out of poverty and into by LatinNews the middle class. According to the UN’s Economic Commission for Latin (www.latinnews.com ). America and the Caribbean (ECLAC), 52.4% of the Mexican population was classed as living under the poverty line in 1994, and although this proportion Latin American Newsletters was pushed down to 42.7% in 2006, it has since climbed back up again to since 1967 51.3% in 2012, almost where it had started just under 20 years previously. Latin American Economy & Business 1 January 2014 - EB-14-01 There are also issues with drug cartels, crime, corruption, poor quality trans - port infrastructure and excessive border controls – the latter a reflection of intensified post 9/11 US security concerns. Nafta supporters tend to acknowledge its shortcomings to date, but say they have new and important reasons to be enthusiastic about what may lay ahead. Certainly, some prestigious analysts are highlighting what they say could be critical and positive turning points. The Boston Consulting Group (BCG), a US-headquartered global management consulting firm, calculates that because of a combination of rising wages in China and growing manufac - turing productivity in Mexico, by 2012 the cost of labour in China was no longer cheaper than in Mexico. Indeed, BCG says that on current trends Mexican manufacturing workers Concamin upbeat could by 2015 achieve a 30% cost advantage over their Chinese counterparts. In its latest (January This, it is suggested, coupled with geographical proximity, will lead to a 2014) ‘Pulso ‘nearshoring’ investment boom by companies active on the US market that Industrial’ report, will be sourcing key components from Mexico rather than from China. Mexico’s industry Jim O’Neill, the former Goldman Sachs analyst who back in 2001 first touted chamber group, the potential of the BRICS group of emerging economies (Brazil, Russia, Confederación de India and China, with South Africa latterly tagged on), has recently turned his focus to a new group, the MINTs (Mexico, Indonesia, Nigeria and Cámaras Industriales Turkey). The MINTs, he argues, benefit from having young populations and (Concamin), forecast being strategically placed geographically; three of the four (including real GDP of 3.7% in Mexico) are commodity producers. O’Neill suggests that in 30 years time the MINTS are likely to be among the world’s ten largest economies. A think- 2014, with year-end tank, the UK-based Centre for Economic and Business Research (CEBR), inflation of 3.9% and recently said Mexico would move up the ranks much faster than that. It said formal employment it would rise from its current position as the world’s 14th largest economy to 9th place by 2028, a promotion “likely to reflect the continuing success of the growth of 570,000. US economy and the position of Mexico in providing cost effective produc - Supportive of the tion for the US market”. Peña Nieto While there are clearly some strong arguments to be made about these long- government’s term trends favouring Mexico, there are also a number of important structural reforms, questions and reservations. One to ask is when the ‘long term’ future will Concamin said that actually become a present-day reality. This brings to mind an old (and some 2014 should see the would say outdated) joke from elsewhere in the region, when people would describe Brazil as “the country of the future” but then add sadly that “unfor - consolidation of the tunately the future never comes”. Some caution may therefore be wise on reforms efforts, this front. The global investment bank JP Morgan has estimated that stronger Mexico’s energy reform could add 1.1 percentage points to annual GDP growth, but not until around 2018; taking into account the long lead-times infrastructure required to reach exploration agreements with oil majors, drill wells, find investment and the economically viable properties and exploit them. articulation of a new This can also be said about all the Peña Nieto reforms: the unexpected can industrial policy. happen, secondary enabling legislation and political compromises may dilute the original intentions, and changes sometimes have unintended and undesired consequences negating the sought-for benefits. Another approach, therefore, is to ignore the promise of the future for the moment, and narrow the focus down to the cyclical short term. It is widely acknowledged that the Mexican economy slowed significantly in 2013, and is now, analysts say, finally set to recover this year, helped by growing demand from its main partner, the US. On ECLAC estimates, real annual GDP growth was just 1.3% in calendar 2013, with the second quarter in particular the low point of the Mexican business cycle. It attributed the 2013 slowdown to “a significant fall in export growth, especially in the first half of the year, but also to less dynamic domestic demand and gross capital formation”. The UN commission forecasts a rebound to 3.5% in 2014. However, its forecast for Latin American Economy & Business 2 January 2014 - EB-14-01 2014 is optimistic, as it puts Mexico above the regional average (3.2%) and Bullish forecasts ahead of Brazil (2.6%). from international banks There is, of course, a potentially positive link between the long-term and the short term narratives about the Mexican economy. To the extent that Mario Correa, Mexico investors and markets believe the narrative about an unfolding long-term economist at transformation of the country’s economic prospects, they will be more likely to want to participate in the short term cyclical upturn – in crude terms, to Scotiabank, is among seek a piece of the action right now. This ‘perception effect’ could come into the international bulls play in 2014, giving a little extra dynamism to the expected upturn, and in on Mexico. He the more optimistic scenarios taking the country’s growth up towards 4%. forecasts real annual GDP growth of 3.3% SPECIAL FOCUS in 2014 and formal REGION employment growth of 713,0000, on the Arrival of the metal-smuggling cartels? back of the US economic recovery For decades the dominant image of organised crime in Latin America has been that of the drug-running cartel, a powerful and dangerous organisa - and a rebound in tion, sometimes linked to paramilitaries of the far Left and sometimes to domestic Mexican those the far Right, which has survived despite a multitude of crop eradica - consumption, as well tion and law enforcement efforts.

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