The New Investor Favorite: Mexico or Brazil?

Fall 2012

In the past, Mexico’s most frequent global image was that of an unsafe country, trapped in gang drug wars. Brazil, on the other hand, was seen as an emerging country with a growing economy, and cheerful people who enjoy soccer and samba. Mexico has not successfully improved its international reputation, whereas Brazil has effectively repositioned its nation, noted Simon Anholt, British expert on country branding, in a March 2012 El Pais Spanish newspaper article. 

However, caught in the current global market turmoil, Brazil’s economic performance has weakened with growth expectations for 2012 at their lowest levels in several years, according to Oscar J. Franck Terrazas, managing director of Integra Realty Resources, Mexico. Terrazas notes that Brazil’s projected growth of 2.05 percent for 2012 is a mere one-third of its 2010 rate, while independent economists forecast a 3.7 percent rate for Mexico. Comparing key economic indicators, Mexico’s rate of inflation in 2012 was 4.3 percent while Brazil recorded a rate of 4.93 percent, over the same period.

graph of Mexico key indicators

At a macro-economic level, Brazil and Mexico are not that different. Although the Brazilian population (195 million) is 58 percent greater than the Mexican population (14 million), their economic growth has followed similar trends since the year 2000. However, the 2009 global economic and financial crisis affected Mexico more deeply, decreasing Gross Domestic Product (GDP) by -6.2 percent, in comparison to Brazil, which fell by only -0.3 percent. For Mexico, the 2009 GDP decline was due, in part, to the country’s significant economic linkage to the United States economy.

The Brazilian economy is more closely tied to China, whose economy is presently undergoing a considerable deceleration. While the sluggish growth of global GDP is pushing down the prices of commodities exported by Brazil, Mexican exports of manufactured products to the United States are increasing, competing fiercely with Chinese imports of electronic goods, machinery and agricultural products.

Even though Mexico is still confronting significant challenges, the country’s potential is being reassessed globally, as Brazil faces serious economic issues. Investors are now considering Mexico to be “the little darling of emerging markets,” replacing Indonesia, as noted by Kenneth Rapoza in a July, 2012 Forbes magazine article. According to Rapoza, Brazil is no longer Latin America’s favorite growth story. Other national publications such as The Economist, The Financial Times, The Wall Street Journal and The New York Times, are making similar assertions.

One key to success in Mexico has been the discipline in public spending and monetary policy. Contrary to the debt crisis in the Euro zone, these policies have enabled the country to sustain macro-economic stability for more than 12 years, bringing long-term certainty to investors.

“Mexico’s economy is highly dollarized,” says Terrazas. “Most large international transactions are U.S.-dollar based, a business practice that is highly preferred by the investment community. In Brazil, lease contracts for office, retail or industrial space are made based in the local Real currency, presenting an exchange risk in the event of major currency devaluation.”

Trade Impacts

Terrazas noted that Mexico has free trade agreements with 43 countries, including the United States and Canada, while Brazil is primarily focused on South American countries. Total trade between Mexico and the U.S. reached $461 billion in 2011 while Brazil’s total trade with the United States in the same year was about $74.68 billion.

The capacity to become a major export platform for multi-national companies in the manufacturing sector has attracted large amounts of Foreign Direct Investment (FDI) inflows in previous years. It is well known that Mexico’s proximity to the United States is one of its most prominent competitive advantages, over other emerging countries, such as Brazil. Since NAFTA took effect in 1994, Mexico has developed a strong alignment to the U.S. economy, facilitating the development of industries oriented to U.S. market demand. Mexico’s exports to the United States represent 83 percent of the country’s total exports.

Key Macroeconomic Facts

Category Brazil Mexico
Population (in millions) 195 114
GDP 2011 value in USD (current prices, billions) $2,483 $1,155
GDP 2011 (change, constant prices) 2.70% 3.70%
GDP per capita, value in USD (current prices) $12,788 $10,154
Gross National Savings (% of GDP) 18.4% 24%
Inflation average (consumer prices) 6.6% 3.4%
Imports 2011 (change) 8.9% 6.9%
Exports 2011 (change) 2.9% 6.3%
Unemployment rate 2011 5.97% 5.2%
General government net debt (% of GDP) 36.41% 40.4%
Current account balance (% of GDP) -2.11 -0.76

Source: International Monetary Fund, World Economic Outlook Database, April 2012

According to the Mexican Ministry of Economy, new investments of automakers in Mexico, such as Nissan, Audi, Volkswagen, Ford, GM, Mazda and Honda, will total $15 billion at the end of President Felipe Calderon’s administration in December 2012. By that time, Mexico will become the world’s fifth biggest exporter of automobiles, completing three million units; and auto parts manufacturers will end up investing $6.9 billion during the same period. The aerospace sector is also booming with approximately 250 foreign companies operating in Mexico, including Bombardier from Canada, making parts and engines for aircraft, with total exports hitting $4.3 billion in 2011.

As Jorge Castro from Argentina’s newspaper Clarin stated, a key feature that distinguishes FDI inflows into Mexico from the rest of Latin America is that more than two-thirds of the total goes to the manufacturing industry.

Another difference between the countries is the way in which Mexico and Brazil are integrated into the global economy. Mexico now leads Latin America among economists and investors that are positive regarding the country’s future potential in the global manufacturing industry. On the investment front, the MSCI Mexico Investable Market Index Fund, an index that measures the performance of the Mexican equity market, grew by 20 percent during the past three years. The equivalent MSCI Brazil Index Fund was up by just three percent.

Despite a “broken image,” Mexico’s economy is improving, with its international reserves now at $149 billion, their highest historical level. Moreover, two million jobs have been created since 2006, while the middle class is expanding. The big challenge for Mexico is whether the administration of new President Enrique Peña Nieto, and the new Congress, can carry out the necessary structural reforms (tax, labor, education and energy) for the country to reach a better and stronger level of development.