Mexico Hopes for Limited Impact From US Crisis

| Aug. 18, 2011 |

Published by Minyanville

The old adage that when the US economy catches a cold, Mexico catches pneumonia was revisited this week. In 2009, then-Finance Minister Agustín Carstens was asked about the maxim but dismissed it, claiming the Mexico would catch only a “little cold.” Thanks to the US recession, the economy plunged 6%.

When asked this time, Finance Minister Ernesto Cordero was a little more cautious. “What is happening in the United States is no little cold,” he said, adding that he still expects 4.3% growth in 2011, despite turmoil in the economy of Mexico’s northern neighbor, where 80% of Mexico’s exports end up.

In another move to offset problems in the United States, Mexico’s federal government is to help state governments refinance their debt with guarantees from Banobras, the state development bank. The measures are designed to increase domestic demand, offsetting the expected fall in demand from the United States as its own economy recovers.

Cordero’s Finance Ministry last week announced the sale of $1 billion worth of 100-year bonds, despite the recent volatility in international markets. The bonds will yield 5.96% in October 2110. They were first sold in October at a yield of 6.1%.

“It’s a pretty aggressive move on their part to be selling 100-year bonds, which tend to be less liquid,” David Bessey, who helps manage $14 billion of emerging-market debt at Prudential Financial, told Bloomberg.

HSBC has slashed its forecast for Mexico’s GDP for 2011 to 3.7% and for 2012 to 3.9%, from 4.1% for both.

New Air and Land Investments

Mexico’s automotive sector received a boost last week as Honda (HMC) announced plans to build a car plant there, set to open in 2014. The $800 million site will employ 3,200 people and is the second major investment by a Japanese car manufacturer in two months.

Honda already produces 60,000 vehicles a year in Mexico and the plant is set to add 200,000 to that figure. The car company will be looking to expand its American market, and Mexico offers low labor costs and close proximity to the United States.

Delta Air Lines (DAL) is to purchase a 3.5% stake in AeroMexico for around $65 million. It is the only US company with a stake in the Mexican aviation industry.

AeroMexico itself announced this week that July saw its highest-ever monthly passenger load factor—the percentage of occupied seats—of 86.9%. The airline carried 8.15 million passengers during the first seven months of 2011, 33% up on the same period last year. The company’s main rival Mexicana went bankrupt 12 months ago.

However, the travel sector is looking weak, with total international arrivals by land, air, and sea dropping 8% during the first six months of 2011, compared to the same period last year.

Carlos Slim No Fan of Giving Pledge

The percentage of Mexico’s GDP that ends up in the hands of charities was just 0.04% in 2003, around 40 times lower than in the United States, Colombia, Brazil, and Argentina. While the figure has risen in recent years, it is still much lower than in more developed countries, despite drug violence that has ravaged the country in the last few years.

It is thought to be the mistrust bred by the drug violence and corruption so rampant in Mexico’s government that has led to the lack of philanthropy in the country. The security situation has also meant that many people are spending cash on their own safety and so have little left for donations.

The world’s richest man Carlos Slim has done little to buck the trend despite his Carlos Slim Foundation, endowed with $5 billion to pay for health and social programs in Mexico. He failed to join the Giving Pledge—run by Bill Gates and Warren Buffett—whereby the world’s wealthiest pledge to donate half of their fortunes to charity before they die. Instead, Slim has stated that the only way to fight poverty is with more employment.

“We need to do more than teach a man to fish,” the Mexican tycoon reportedly says. “We need to teach him how to build a fish business.”