In the years since coming close to financial collapse in 1994-95, the country has become more tightly integrated with its NAFTA partners – the US and Canada – and has gained a reputation for credible macroeconomic policy management. However, tighter integration with the US and Canada is a mixed blessing. Since Mexico’s business cycle now moves in lock step with the US, the country experienced a large growth shock in 2008-09. On the flipside, recovery in the US from its worst recession since the 1930s has helped the Mexican economy to bounce back. However, despite the cyclical recovery, Mexico’s economy faces longer term structural challenges that could crimp growth potential: a political structure resistant to reform and tenacious organised crime groups unafraid to use violence.
Mexico is richer, more creditworthy and more congenial for business than the regional average. However, its growth performance has lagged.
Exporters and investors face three main risks in Mexico: high business cycle and currency risks as well as a high degree of difficulty enforcing contracts.
|Interpreting Chart 2 |
Business cycle risk. A volatile business cycle can be a special headache for exporters and investors, because it means that downturns will be steep – and corporate casualties high.
Currency risk. In today's world of widely floating exchange rates and sophisticated currency hedging techniques, some degree of currency volatility is quite acceptable, and presents little risk. But where a country has a weak balance of payments or is prone to wide swings in capital flows, it can suffer sudden and dramatic currency moves that can bankrupt large swathes of its corporate and banking sectors.
Currency inconvertibility risk. If the country suffers from a weak balance of payments, not only is it prone to steep currency depreciation, but there is a temptation for the government to impose exchange controls that prevent importers from converting local currency into foreign currency in order to make trade payments.
Systemic banking risk. Weak balance sheets and poor lending practices can sometimes trigger sector-wide banking crises.
Sovereign default risk. Fiscal mismanagement can put governments under financial strain to which they respond by delaying or halting payments to overseas suppliers and creditors. With the government cut off from credit, a sovereign default also increases the likelihood of a sharp downswing in the economy, currency inconvertibility and a systemic banking crisis.
Difficulty/cost of enforcing contracts. If you get into a contractual dispute, will the country's legal and judicial system help or hinder you in pursuing a claim? Drawing upon World Bank data on the cost and time involved in enforcing contracts (at www.doingbusiness.org) we seek to measure the degree of help or hindrance.
The scale runs from negligible to extreme.