Thornhill Capital LLC - consulting, financial, accounting, compliance, due diligence, risk management, translation and other services, B2B, USA, China.

Published on Jan 3, 2013 in Newsletter

Current state of Latin America

Below is an article from DS Capital. My close friend Jose Sada, and his associate Jose Garza, have been kind enough to provide me with a paper on the Current state of Latin America. This an an excellent insight into the growth taking place in Latin American and in Mexico. We’ve worked closely with Jose Sada, and the investment banking firm he founded, DS Capital, for the past 12 years. During that time Jose has continued to provide us with a great deal of knowledge on the Latin American and Mexican economies, as well as the emergence of business opportunities in Mexico. We hope you’ll find their article as informative as we have.       

Current state of Latin America

The Organization for Economic Co-operation and Development states on their Latin American Economic Outlook for 2012 that: “The current international and national contexts of Latin America and the Caribbean open a window of opportunity for countries in the region to design long-term development strategies. In addition to the gradual consolidation and strengthening of its democratic systems, most of the region has resisted the economic and financial crisis well thanks to responsible macroeconomic management and structural reform over the last years.”

Unlike during other global crises, such as those lived in 1981 or 2001, during the 2008 Global Financial Crisis, Latin America continued to close the per capita income gap compared to that of developed countries. This is a process which started a little over a decade ago and forecasts indicate the gap will continue to narrow even further in the coming years. It is clear that this region has left behind its non-orthodox economic policies from the 70’s and 80’s, to successfully transition into a new era of economic stability

As a whole, Latin America continues to show a vast improvement on their vulnerability indicators, which according to the IMF: “provide essential input for International Monetary Fund surveillance and lending, and are used for analysis and stress testing under the Financial Sector Assessment Program (an in-depth analysis of a country’s financial sector) and as a part of early warning systems models”. Given the stability and moderation in inflation in the region, and in spite of an increase in uncertainty with respect to the external environment (i.e. political and economic uncertainty in Europe, China’s economical slowdown, amongst others), the monetary policy in Latin America has been cautiously gearing towards supporting the growth of economic activity. The International Reserves have continued to increase in most countries of Latin America, whilst fiscal and external vulnerabilities remain at relatively low levels. The deficits are kept at manageable levels and public debt has been declining as a percentage of GDP in most countries over the last 10 years.

Mexico post-GFC

Mexico’s economy received a harsh blow due to the GFC; economic activity fell sharply in 2009 and the financial markets experienced great volatility, resulting in a 6.2% drop in its GDP. Nevertheless, the financial system proved resilient and the economy and financial system vastly recovered in 2010 due to a sound Monetary and Fiscal Policy.

The authorities pursued countercyclical policies to counter-attack the impact of the GFC; the monetary policy was directed at maintaining a target inflation which ensured price stability and fiscal policy was guided by a balanced budget rule. In 2009, the fiscal stimulus amounted to about 3% of GDP, while the central bank reduced its policy rate by 375 bps. The flexible exchange rate regime buffered the impact of the crisis and helped a strong export resurgence, which sped up the recovery process.

With the recovery underway, the authorities started fiscal consolidation in 2010, while monetary policy remained helpful in bringing about a harmonious adaptation, resulting in a 5.5% growth by year’s end.

Mexico today

Eric Martin writes for Bloomberg Businesweek “The Goldman Sachs Asset Management chairman is now promoting a new foursome of fast-track countries: Mexico, Indonesia, South Korea, and Turkey” now known as MISTs. These countries make up the four biggest markets in the Goldman Sachs N-11 Equity Fund, considered to be the next big 11 emerging markets. This fund has climbed 12% this year, compared to a 1.5% increase in Goldman Sachs’s BRICs fund.

The New York Times published a recent article in June 12, 2012 which stated that: “Mexican factories are exporting record quantities of televisions, cars, computers and appliances, replacing some Chinese imports in the United States and fueling a modest expansion”. In contrast to the widening crisis in the euro zone, Mexico has enjoyed over 15 years of macroeconomic stability, low inflation, increasing competitiveness and a manageable debt, all of which have been fueled by Mexico’s approach towards development invested in deregulation, free trade, and open markets.

The banking system appears to be sound and profitable, it has been strengthened considerably in recent years, and private banks appear to be well capitalized.

Mexico – China

According to the Boston Consulting Group, Mexico may already be a less expensive place to make an array of products for the U.S. market; BCG estimates that China´s average manufacturing wage topped Mexico’s this year, when accounting for differences in productivity. Mexican workers typically produce more per hour than Chinese workers, and the proximity to the U.S. guaranteeing short merchandise transit time, lower transportation costs, amongst other variables, gives Mexico a competitive advantage over their Chinese counterparts.

China’s world-wide exports were nearly double of Mexico’s total in 2002, 312.8 billion and 159 billion respectively. Nowadays China exports nearly US $1.9 trillion (2011) worth of goods a year world-wide, a figure roughly 5 times as much in dollar terms as Mexico’s (349.7 billion). Nevertheless, the average wage across China has climbed to $2.50 an hour, including benefits, from 60 cents in 2000. Mexico’s average wage, including benefits, is about $3.50 an hour and several analysts believe that wages in China will likely top those in Mexico in the coming years. If one were to analyze labor costs in the manufacturing sector, China’s labor costs have increased almost 20 per cent a year on average between 2003 and 2011, whereas Mexico’s wages have remained fairly flat during this same period. These numbers have reduced the gap that placed Mexican wages six times higher than Chinese wages in 2003, to just 40 per cent higher last year. This increase in wages will give Mexico an opening to regain some of the lost businesses that transferred to China for cheap labor over the past decade.

Mexico Foreign Direct Investment

Automobile production in Mexico has hit record levels and a number of both U.S. and non-U.S. car makers are planning multibillion manufacturing factories in Mexico. Renowned car manufacturers Ford and Nissan have announced multi-million dollar investments in manufacturing plants in Sonora and Aguascalientes, respectively. Thanks to open trade policies, Mexico is emerging as a car assembly platform for the Americas. A record auto export is one of the main drivers as to why Mexico’s growth has been outpacing Brazil’s for a second straight year.

The food industry giants Coca-Cola Company and Grupo Ferrero have also announced multimillion dollar investments in Mexico and new investments in aerospace and electronics are in the horizon as well. All of these foreign direct investments have generated and continue to generate countless direct and indirect jobs.

Nevertheless, Brazil remained by far the largest recipient of FDI in Latin America during 2011, hitting a record high of $66.7 billion compared to Mexico’s FDI of $19.4 billion in 2011, still below the pre GFC average of $24.3 billion from 2004-2008, which can be somewhat attributed to slower growth in the U.S. Throughout the first semester of 2012, Mexico received over U.S. $ 9.6 billion in FDI, out of which, the top three sectors which consist of: manufacturing (38.6%), financial sector (22.6%), and construction (11.7%). Out of the U.S. $9.6 billion invested through the first semester, the two countries that most invest in Mexico are EUA and Spain, representing 36.9% and 30.8% respectively, other noteworthy countries include Luxembourg, Germany, and Japan.

In order to increase FDI, Mexico has also increased its infrastructure investment from 3% of annual economic output a decade ago, to 5%. There are also over 50,000 engineers graduated a year in Mexico, and such qualified workforce should make it more attractive for other countries to invest heavily in Mexico. These are just a couple of trends that have been taking place, which in turn, will vastly improve Mexico’s competitiveness.

There are several other advantages that Mexico offers to investors, one such being that it is a much friendlier business environment than most hard-charging growth markets. According to the World Bank’s Economy Ranking on their ease of doing business, Mexico currently ranks 48th and 36th in starting a business, 5th in Latin America & Caribbean as a whole behind Chile, Puerto Rico, Peru, and Colombia, benchmarked to June 2012. Whereas China and Brazil rank 91 & 130 in ease of doing business, respectively and 151 & 121 in starting a business, present a somewhat less friendly environment for conducting business.

Another upside which Mexico benefits from is that it has a young and, as previously mentioned, increasingly educated population. A total of 48% of the population is aged 25 or under. Prior to the GFC, both Mexico’s economy and consumer market had been enjoying steady growth. More of the population shifted from poverty towards middle class, which lead to increased spending, but took a step backwards in 2008-2009. Today, the Mexican economy is back on track and its consumer market should resume quickly and its politics have attained a degree of stability that should enhance business confidence. With the second highest population in Latin America and an ever growing middle class, Mexico is an especially attractive market to invest in.

Mexico Problems

Even though Mexico looks poised towards healthy economic growth, it is quite clear that there are still several issues that need to be dealt with in order to usher in this new era of hopeful economic prosperity.

In Mexico, financial intermediation and credit to the private sector are among the lowest in Latin America and well below other emerging markets of comparable income. Mexico’s financial system is small and concentrated, with seven banks accounting for more than 80% of the system’s assets. According to the World Bank, Mexico’s domestic credit to private sector (% of GDP) represented 19.7% in 2006 and 26.1% in 2011, whereas taken as a whole, the Latin American & Caribbean domestic credit to the private sector represented 31.1% and 44.8% for 2006 and 2011 respectively. It is worth noting that during this period, Mexico’s GDP per capita increased from US $8,830.8 in 2006 to US $ 10,064.3 in 2011 which represents a 13.97% increase, whereas during the same period, in Latin America & Caribbean, the increase was more notable from US $5,819.7 to $9,753.9, representing an increase nearly five times greater than in Mexico, at 67.60%.

Nevertheless, Mexico’s President-elect, Enrique Peña Nieto, is expected to usher in a wave of reforms to boost growth once he takes office, especially in two important sectors: Oil and utilities. Most likely, a mix between the government and the private sector will boost investment. The liberalization of these sectors should create many opportunities for new investments.

DS Capital Partners

Since its foundation in 2001, DSCP has successfully established a track record of a wide varied number of transactions in debt transactions and M&A in multipurpose industries. Along with its qualified staff, DSCP is an investment banking boutique established in Monterrey, Mexico that can offer numerous services for strategic or financial investors.

References:

http://www.imf.org/external/pubs/ft/scr/2012/cr1265.pdf.

http://www.bbvaresearch.com/KETD/fbin/mult/1208_Situacionlatinoamerica_tcm346-351636.pdf?ts=392012

http://www.procei.mx/Documents/Maresp2012.pdf

http://eleconomista.com.mx/industrias/2012/03/30/ford-invertira-1300-mdd-planta-hermosillo

http://www.procei.mx/Documents/Maresp2012.pdf

http://en.mercopress.com/2012/01/25/brazil-record-foreign-direct-investment-more-than-compensates-current-account-deficit

http://www.doingbusiness.org/rankings

http://www.bostonglobe.com/business/2012/08/13/world-stage-mist-outperforming-bric/4zTw5VtVqYodUQFBugq2yK/story.html

http://www.mexicorepresentation.com/?cat=11

http://www.businessweek.com/articles/2012-08-09/move-over-brics-dot-here-come-the-mists

http://www.oecd.org/dev/latinamericaandthecaribbean/48965859.pdf

http://www.economia.gob.mx/files/comunidad_negocios/comision_nacional/2012_ii.pdf

Alan Refkin               David Dodge

© 2013 Thornhill Capital. All Rights Reserved

 

Thornhill Capital provides onsite due diligence; financial reconstruction in compliance with IFRS, US GAAP, PRC GAAP, and Hong Kong GAAP; audit preparation and process management; internal control design and testing; reconciliation of Chinese tax reports to audited financial statements; bi-lingual CFOs; translation services; and a variety of other accounting, compliance, and administrative services for companies around the globe. 

A full list of services can be found at www.thornhillcapital.net

This publication is for informational purposes and reflects the personal opinions of Thornhill Capital. This publication is not intended to convey any legal, accounting, or investment advice. The information herein should not be used or relied upon in regard to any particular facts or circumstances without first consulting a lawyer, investment advisor, certified public accountant, or other relevant professional.