Mexico Risk & Balance of Payment Analysis

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Mexico’s economy is export oriented. Their main exports are manufactured products, crude oil, petroleum products, silver, fruits, vegetables, coffee, and cotton. Furthermore, Mexico has a growing automobile manufacturing industry, which now accounts for around 26% of total shipments. Mexico exports heavily to the US, as they are their main export partner (80%) followed by Canada (3%).

Mexico leading imports include machinery, electrical and electronic equipment, motor vehicle parts, aircraft, and manufactured consumer goods. As of January 2016, imports in Mexico have decreased by 6.2 %, as compared to January 2015. One of the largest decreases in imports was oil products, as purchases of oil products declined by 30.3 %

Sinking oil prices have contributed to a large increase in the trade deficit, as it mushroomed from $2.85 billion in 2014 to $14.46 billion in 2015. This is largely due in part to Mexico’s petroleum component of trade, which plummeted from a $1.1 billion surplus in 2014 to a $9.9 billion deficit in 2015. As compared to January of 2015, exports in Mexico had shrank by 7.6%. Again, lower oil prices were a large contributing factor, as oil sales dropped 49%.

As of January 2016, Mexico has recorded a capital account surplus of $8.61 billion. Mexico’s capital account inflows have been staggered over the past 5 years, with capital deficits in early 2012, as well as in late 2014 (Table 3).

However, sinking oil prices have pushed Mexico’s peso to record lows in recent months, and therefore have been greatly affecting public finances. Furthermore, in early February, Mexico had announced budget cuts and rate hikes as a means to prevent further slumping of the peso, as well as to keep inflation from spiking.

With the dipping oil prices, and the vulnerability of the peso, foreign investors have decreased holdings of Mexican stocks during the 4th quarter of 2015 by $960 million. Contrary, to the previous quarter, in which investors increased holdings by $1.17 billion in local stocks. Furthermore, foreign direct investments fell to $3.68 billion during the 4th quarter, which is down from $8.73 billion in the previous quarter.

However, the Bloomberg reports that investment experts believe that Mexican investments are one of the best investment opportunities in the emerging markets. Due to the currencies 27% plunge in the past 18 months, Mexico’s local bonds and stocks make for cheap investments to foreign investors. Furthermore, despite a difficult global economic environment and a large dip in the Mexican Stock Exchange in early January, the market has grown, with returns of 4.59% in the past year, and 4% returns year to date.

Conclusion

Mexico boosts one of the largest economies, and is a growing power in the world. They

hold a very strong tie to the United States, who is the global economic leader, and are among

one the world’s largest importers and exporters. Many of the risks related to Mexico deal with

its reliance on oil, and hence the the impact lower oil prices have had on its economy. This also

coincides with the decrease in the value of the Peso, and the uncertainty by the government on

to how to fix it. Furthermore, Mexico’s past of government corruption and scandal, as well as

high crime rate, continues to be an issue that they have not been able to resolve. Oil has been a

large factor in Mexico’s current account, which has reached record deficits that haven’t been

seen for 20 years. Indicators also suggest the deficit will continue to climb, although the

declining in oil prices has seemed to level out or stall. Mexico’s capital account has been

affected by the lowering of the peso, however the Mexican stock market has been doing well,

and the lowering value of the Peso may be appealing to foreign investors to invest in Mexican s

stock’s and bonds.

Reference

Table 1

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Table 2

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Table 3

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Works Cited

"Despite Global Economic Scene, Mexican Stock Exchange (IPC) Has Grown 5.93% so Far This Year." Yucatan Times. N.p., 18 Feb. 2016. Web.

"Despite Global Economic Scene, Mexican Stock Exchange (IPC) Has Grown 5.93% so Far This Year." Yucatan Times. N.p., n.d. Web.

"MEXBOL Quote." Bloomberg.com. Bloomberg, n.d. Web. 03 Mar. 2016.

"Mexico Capital Account | 1960-2016 | Data | Chart | Calendar | Forecast." Mexico Capital Account | 1960-2016 | Data | Chart | Calendar | Forecast. N.p., n.d. Web. 03 Mar. 2016.

"Mexico: Risk Assessment." GlobalEDGE: Your Source for Global Business Knowledge. N.p., n.d. Web. 03 Mar. 2016.

"UPDATE 1-Mexico Current Account Deficit Deepest in at Least 20 Years." Reuters. Thomson Reuters, 25 Feb. 2016. Web. 03 Mar. 2016.