Trade with Mexico's Asian TPP partners...

In 1993, 1.7% of Mexico's exports went to its Asian TPP partners. In 2013, 1.1% of Mexican exports went to those countries. In 1993, 78% of Mexico's exports to its Asian TPP partners went to Japan; in 2013, that percentage was 53%.

In 1993, 7.1% of Mexico's imports came from its Asian TPP partners. In 2013, their share was 6.9%. In 1993, 84% of Mexico's imports from its Asian TPP partners came from Japan; in 2013, it was 65%.

There's lots of room for trade to grow. 

Mexico's Asian TPP partners...

Between 1999 and 2013, just 2.7% of foreign direct investment (FDI) in Mexico came from Japan, Malaysia, Brunei, Singapore, Vietnam, Australia and New Zealand -- the Asian TPP cohort. More than four-fifths (82%) of that 2.7% came from Japan and over half of the Japanese FDI was made in 2012 and 2013.

Mexico's record 2013 capital account surplus: good news and bad news...

Mexico's 2013 capital account surplus of US$58.6 billion was the largest in the country's history. That's good news. So is the fact that portfolio investment played a less significant part in it and that foreign direct investment (FDI) posted an historical high.

There's bad news too. Mexico’s net foreign debt climbed; Mexican deposits in foreign bank accounts soared; and the proportion of the capital account surplus going into reserves declined while that required to finance the current account deficit rose.

Let’s look at the good news. In each of the last four years (2010 – 2013), Mexico’s capital account surplus has posted a new historical high. Between 2010 and 2012, portfolio investment drove the surplus: in 2010 and 2011, portfolio investment equaled half of the capital account surplus; in 2012, portfolio investment exceeded the capital account surplus. In 2013, the 62.9% fall in portfolio investment inflows (to US$$21.0 billion) and the doubling of FDI (to US$35.2 billion) reduced portfolio investment’s contribution to the capital account surplus to 35.9%.

The surge in FDI was thanks to AB InBev’s purchase of the 50% of Grupo Modelo shares it didn’t yet own. New investments constituted half of last year’s FDI. Increases in subsidiaries’ debt with their parent companies accounted for a fifth of FDI in 2013. Reinvested profits, which appear as an outflow in the current account, accounted for 29.4%. 

Now for the bad news... First, there's how the capital account surplus was distributed between reserves and financing the current account deficit. Last year, reserves rose US$13.0 billion, their smallest increase since 2009 and an increase that was US$8.0 billion smaller than in 2012. Financing the US$22.3 billion current account deficit, the largest since 1994, required US$7.6 billion more than in 2012.

The near tripling of Mexico’s net debt with the exterior is another piece of unwelcome news. Mexico’s net foreign debt increased US$41.9 billion last year, second only to 2010’s US$45.4 billion increase. To put the figures in perspective, the increase in 1995 when the US Treasury arranged the famous loan to Mexico, net foreign debt rose US$26.5 billion.

Mexico's net foreign debt soared last year, just as in 2010, because of jump in private sector borrowing. Private commercial banks took on an additional US$15.1 billion of net debt in 2013. In 2012, they repaid US$3.2 billion. In 2010, they borrowed US$29.3 billion. The net debt of private sector firms increased US$18.1 billion last year, more than double 2012’s increase, which was an historical high. In 2010, the non-banking private sector borrowed US$8.4 billion. In 1995, the private sector –- banks and non-banks – repaid US$1.3 billion.

In contrast, the public sector (development banks plus the non-banking public sector) took on just US$8.6 billion in net debt in 2013, 1.8% less than in 2012. In 1995, the public sector took on US$14.5 billion in net debt and the Banco de México, another US$13.3 billion.

Another piece of bad news is the jump in assets held abroad, which rose US$39.5 billion in 2013, 15.9% more than in 2012. There were significant changes in their composition: Mexican FDI plunged while Mexican deposits in foreign bank accounts climbed.

Last year, Mexican FDI totaled US$10.0 billion, a bit more than half of its 2012 level. While well below its 2010-2012 annual average of US$17.0 billion, it was still above its US$6.3 billion annual average in 2005-2009. 

The big movements in the assets held abroad account came from the growth of Mexican deposits in foreign bank accounts. Those deposits soared US$27.4 billion last year, an historical record. In 2012, they rose US$3.1 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.

The valuation adjustment to reserves bears mention because of its size. Until 2013, the largest valuation adjustment to reserves ever made was in 2011. It reduced the value of reserves by US$441 million. In 2013, the valuation adjustment added US$4.6 billion to reserves. 

Why Mexico's current account deficit is climbing...

In Mexico, the trade account deficit typically drives the growth of the current account deficit. That has not been the case for the last three years, years in which the current account deficit grew significantly.  Climbing factor services payments (principally interest payments and remitted or reinvested profits) explain the jump in the current account deficit. 

In 2013, the deficit in the factor services account was US$41.4 billion, 35.0% higher than in 2012. Between 2008 and 2010, outflows for factor service payments averaged US$15.8 billion annually. Between 2011 and 2013, the annual average jumped to US$24.8 billion. 

The upward trajectory of the current account deficit over the last three years serves as a reminder of how easily a jump in factor service payments, helped along by a reduction in oil export revenues and remittances, can transform a minimal current account deficit into a not so minimal one. 

While we expect Mexico’s current account deficit to rise from 1.8% of GDP last year to 2.2% this year and 2.5% next, foreign direct investment (FDI) should come close to covering the entire current account deficit – provided that the reforms passed last year are implemented in the ways we hope. Both this year and next, the projected deficit remains below the 3% of GDP that is the upper limit of what is considered to be a safe level for developing countries.

Government to taxpayers: don't pay me yet

Whether you call this year's tax package a fiscal reform or not, everyone can agree that there are a multitude of changes to take into account when calculating taxes due this year. January and the first part of February have been a nightmare for taxpayers scrambling to figure out how much they owe under the new fiscal provisions. That wasn't a surprise.

It was a surprise, though, when Hacienda told individual taxpayers that they should wait an extra month, until March, to pay their January taxes and then pay them along with their February tax payments. It's not out of concern for taxpayers that Hacienda isn't collecting January's taxes this month: Hacienda's platforms simply weren't up to the job.

Meanwhile, negotiations continue as to whether everything that, as of January 1, is no longer deductible will stay that way. The private sector is holding on to the hope that some benefits might be more deductible than others.

Security: the most important obstacle to Mexico's growth

According to the Banco de Mexico's January survey of private sector economists, security problems are the single most important limitation to Mexico's growth in the next six months.

Yes, but...

Each month,  the survey asks participating economists (of which I am one) to choose three factors from a list of 23 that will be the principal limitations on growth in the next six months. "Problemas de inseguridad publica" is always included on the list. It's not surprising that it headed the list in the January survey, given the Government's frontal attack on the security problems in Michoacan. Like everyone else, economists can be influenced by what's in the news. That the Government has chosen to address the challenges to state authority raised by druglords' control of parts of the state and the rise of the auto-defenses is a major policy decision.

All through 2013 (and before), problems of public security have been on the radar screen as limitations to growth. Over the last year, security has typically been in 3rd or 4th place. Until January, "weakness of the world economy" and of "weakness in foreign markets" have been considered the most important limits to growth. They have often been followed by "international financial instability". Security "beat out" those first two standards by 2 and 1 percentage points, respectively, in January. That's hardly a resounding lead. 

There's nothing new in the fact that economists from the private sector see security problems as a limitation to growth. That's been the case for some time, per the Banxico surveys. However, be careful about citing it as the most important limitation to growth on the basis of a single month's survey and the fact that it received 20% of responses instead of 19% or 18%.

Will Banco de Mexico raise the Reference Rate?

Between the unexpectedly high inflation rate in the first half of January and the market turmoil, the odds that Banco de Mexico will wait until 2015 to raise the Reference Rate are falling. The inflation rate alone would not cause Banxico to raise the Reference Rate since there’s hope that price increases will have been frontloaded more than had been anticipated. However, the contagion effect from the “Fragile Five” complicates the situation.

To combat the flight from their currencies, the Five have raised interest rates. Turkey has been the most aggressive, boosting its benchmark rate from 4.50% to 10.00% on January 28; the overnight lending rate the climbed from 7.75% to 12.00%. India’s central bank raised the country’s key interest rate from 7.75% to 8.00% the same day and also announced that it will adopt a monetary policy to target inflation (an objective of 6% by 2016) whether the government is in agreement or not. The South African and Brazilian central banks both raised interest rates half a percentage point in January. On the 15^th, Brazil set the rate at 10.50%. On the 29^th, South Africa’s rate moved up to 5.5%. Indonesia is the outlier. Although the central bank hasn’t raised rates this month, it did surprise the markets in November when it raised the rate from 7.25% to 7.50%.

In their January 29 monetary policy announcement, Banco de Mexico’s Board of Governors defied the trend in which emerging markets’ central banks have raised key interest rates. The Board left the Reference Rate at 3.50%, where it has been since October 25, 2013. However, the Governors cautioned that the balance of risks has deteriorated and are watching for signs that inflationary expectations are rising or that the depreciation we’ve seen is feeding through to inflation. If that happens, the only surprise would be if if they don't raise the Reference Rate this year.