Reflections on 2013...

1) Congressional gridlock is not inevitable.

We've seen that congressional gridlock is not endemic to Mexican democracy: game-changing legislation can be passed even though the president’s party does not control Congress. Whatever your opinion of President Peña, it is undeniable that he is a skilled politician.

2) Reforms don’t work their magic overnight.

This year has taught us that reforms don’t boost the growth rate immediately. The time that elapses between passage of a law and its impact on growth depends on the type of reform and its scope. The energy reform is a case in point: it could be a decade before the expected new investments in oil production bear fruit.

3) Tweaking the economic model.

The Peña Administration has enlarged on prior governments’ commitment to sound macroeconomic policies. This Administration’s economic policy overlays the classical PRI strategy of government-provided social programs financed by deficit spending on a commitment to maintaining macro-economic stability. It can be a difficult balancing act, especially over the medium and long-term. Structural reform is the second piece of the policy puzzle. The Administration is betting on reform to boost the economy’s sustainable long-term growth rate.      

4) A changing external environment.

A consequence of the Fed's quantitative easing (QE) policy was that liquidity flooded world financial markets. Some of that liquidity found its way into emerging markets, strengthening their currencies. The Fed will, at some point, decrease and then eliminate its liquidity injections. When that happens, the countries that have received large inflows of portfolio investment should not be surprised if foreign investment in their fixed income and equity markets drops off.

The number and breadth of the economic reforms passed by Congress in the first year of the Peña sexenio is nothing less than breathtaking. The next five years will tell if the reforms live up to their billing.

The many ways one purchase affected direct foreign investment numbers...

Foreign direct investment (FDI) totaled US$28.2 billion in the first nine months of 2013, nearly doubling that of the first nine months of 2012. FDI should exceed US$30 billion this year and is likely to exceed annual portfolio investment for the first time since 2009.

Judging by the third quarter FDI figures, AB InBev’s purchase of the 50% of Grupo Modelo shares it didn’t yet own finally went through in the first half of the year. FDI in the third quarter of 2013 was just US$3.4 billion, just 12.0% of total FDI in the first nine months of 2013. Without the Modelo purchase, FDI this year won't be much more than last year's.

New investments were a minimal 2.3% of FDI in the third quarter. Increases in subsidiaries’ debt with their parent companies accounted for virtually half (49.7%) of FDI in the third quarter while reinvested profits, which appear as an outflow in the current account, accounted for 48.0%.

Reflecting the sale of Grupo Modelo, nearly half (47.0%) of FDI in the first nine months of this year came from Belgium. The US, traditionally Mexico’s principal source of FDI, was the second largest source, with a quarter (25.3%) of the total. The Netherlands contributed 6.6% of the total, followed by the U.K. and Japan, with, respectively, 4.4% and 4.2% of the total, and Germany, with 3.3%. The remaining 9.2% came from all other countries combined. 

Four-fifths (79.9%) of FDI in the first nine months of 2013 went into manufacturing, the sector in which the Modelo purchase falls. Typically, about half of FDI goes into manufacturing. Mining received 4.6% and commerce, 3.9% of the total. Information in mass media attracted 3.0% of the total and temporary lodging, 3.0%. The remaining 5.5% went into all other sectors.  

Assets held abroad rose US$28.0 billion through September, roughly in line with their US$29.3 billion increase in the same period of 2012. However, there were significant changes in their composition: Mexican FDI plunged while Mexican deposits in foreign bank accounts climbed.

Mexican deposits in foreign bank accounts soared US$26.1 billion in the first nine months of 2013.  In the same period of 2012, they rose US$4.2 billion. The tremendous jump in deposits in foreign bank account may well be explained, in part, by the sale of Grupo Modelo: Mexican shareholders may have chosen to place the proceeds of the sale in foreign bank accounts.

In the first nine months of 2013, Mexican FDI totaled US$6.5 billion, a third of its level in the first nine months of last year. Mexican FDI this year should be above its 2005-2009 annual average (US$6.3 billion) but far below its 2010-2012 annual average (US$17.0 billion).

If you see an FDI figure of US$1.2 billion reported for the third quarter, that's FDI using the new reporting methodology, which nets FDI in Mexico and FDI by Mexican companies. In the third quarter of 2012, that number was US$0.3 billion. For the first nine months of this year, thanks to the Modelo purchase and the drop off in Mexican FDI abroad,  FDI with the new reporting methodology was US$21.8 billion. Mexican FDI exceeded incoming FDI in the first nine months of 2012 to the tune of US$4.4 billion.

Portfolio investment is back but not like before...

Portfolio investment returned to Mexico in the third quarter: US$6.70 billion (net) came into the country in the form of investments in equities or fixed income instruments. This year's US$12.87 billion of portfolio investment through September is on a par with portfolio investment in the same period three years ago. But, it it is about half its level in the first nine months of 2011 and a third of its level in the first nine months of 2012. No wonder Mexico's central bankers are spreading the message that the monetary policy decisions by central banks in developed countries have consequences for emerging markets.