Good year ahead for Mexico while investors feel frustrated with ‘Brazil cost’
Brazil and Mexico, Latin America’s two largest economies could be facing a 2013 of contrasting performance and prospects. Brazil has been hit by weakening Chinese demand for commodities, while rival Mexico, the new darling of foreign investors, is posting increasingly strong growth. The figures speak for themselves.
Brazil, for a decade Latin America’s unchallenged behemoth, is expected to grow a mere 1% this year, down from 2.7% in 2011 and an incredible 7.5% in 2010, according to official figures.
By contrast, Mexico, the perennial underachiever in Latin America, is suddenly eying a position among the world’s 10 largest economies with projected growth of between 3.5% and 4%.
Mexico took a massive hit from the 2007-2008 financial crisis thanks in large part to its proximity to the United States, and its economy contracted a whopping 6% in 2009.
But a huge reduction in Mexico’s “country cost”, the cost of doing business there, sparked an impressive turnaround that attracted investment in its industrial sector, created jobs and added value to its exports.
Juan Jensen, head of macro-economics at Brazilian consulting firm Tendencias, attributed the slowdown in Brazil’s 2.5 trillion dollars economy to a major loss of competitiveness reflected in salaries that far outpaced inflation.
“Brazil lost because of its higher production costs,” Jensen said, adding that the Brazilian government’s tolerance of higher inflation and opaque fiscal policy had been problematic.
Mexico, which has built on NAFTA since 1994 and now does more than 90% of its foreign dealings under free trade agreements, continues to lower its production costs to compete, including with China.
“Mexico continues to offer cheap labour, has an infrastructure for some ‘durable goods’ such as automobiles, computers and home appliances,” said Octavio Gutierrez, chief economist at BBVA bank in Mexico City.
This enables it to quickly expand production for exports to the all-important US market and explains the relocation of industrial plants to Mexico as “one of the pillars” of the country’s development, he added.
“The difference with Brazil has to do with costs. Mexico has increased unit labour costs much less than Brazil,” Gutierrez said.
Brazil has recorded a worrying fall in productive investment, down 4.5%, and a sharp 2.7% contraction in its industrial output, according to the National Confederation of Industry.
Meanwhile, Mexico is reaping the benefit of a slow but steady pickup in demand for its products in the United States. Its industry grew 4.2% between January and September this year compared with the same period in 2011.
Economists see the difference in foreign trade focus as the key factor that explains the contrasting performances of the Latin American rivals.
“Brazil is almost returning to its model of the 1960s which was to look inward and be more protectionist and to subsidize companies,” said Claudio Loser, the former director of the Western Hemisphere Department at the IMF who now heads the Latin American branch of the Centennial Group think tank.
“I think Mexico has an economy which overall is much more efficient and better integrated with the world than that of Brazil, which rested a bit on its laurels,” he added.