Luis Perezcano makes the argument that Mexico is part of the North American economy and should be part of the BRIC countries.

1. NAFTA
FUND
Mexico: A BRIC in
North America
January 2007

2. Index
I. Is Mexico a North American Economy?
II. Is Mexico a BRIC?
III. Challenges
i. Short Term
ii. Long Term
IV. Recommendations to liberate growth potential
1

3. I. Is Mexico a North American
Economy?

4. Is Mexico a North American Economy?
Economic Cycle
Mexican economic cycles are strongly linked to those of the US.
Mexican manufacturing GDP growth rate
and USA industrial production
NAFTA
TLCAN
15%
Corr: -0.07 Corr: 0.67
10%
5%
0%
-5%
US Industrial Production
Producción Industrial EUA
-10%
Mexican manufacturing DGP
PIB Manufacturero México
-15%
1988/03
1987/04
1989/02
1990/04
1993/04
1994/03
1996/04
1998/02
1999/04
2002/04
2004/02
1987/01
1990/01
1991/03
1992/02
1993/01
1995/02
1996/01
1999/01
2000/03
2001/02
2002/01
2003/03
1997/03
Chow s test shows significative evidence (F = 6.88) of a structural change in the economic
cycles correlation as a result of NAFTA implementation.
Source: INEGI, Federal Reserve Board. 3

5. Is Mexico a North American Economy?
Exchange rate volatility
Exchange volatility has converged toward levels of the major
currencies. Moreover, the new floating exchange rate policy has
allowed to adequately absorb external economic shocks.
45%
40%
35%
30%
25% Canadian dollar
German mark/ Euro
20%
Japanese yen
15% Mexican peso
10%
5%
0%
Ene/94
Ene/98
Ene/04
Ene/95
Ene/96
Ene/99
Ene/00
Ene/01
Ene/02
Ene/03
Ene/05
Ene/06
Ene/97
Source: www.oanda.com.
4

6. Is Mexico a North American Economy?
Inflation
Inflation has converged towards comparable levels between USA
and Canada.
55%
50%
45% Canada
40% Mexico
35% U.S.
30%
25%
20%
15%
10%
5%
0%
-5%
Nov/99
Oct/95
Oct/02
Abr/99
Ago/94
Jun/00
Ago/01
Dic/96
Dic/03
Ene/94
Ene/01
Jul/04
Jul/97
May/96
Feb/98
May/03
Feb/05
Mar/95
Mar/02
Sep/98
Sep/05
Source: INEGI, Federal Reserve System & Bank of Canada.
5

7. Is Mexico a North American Economy?
Short term interest rates
The short term interest rates have reached historic lows and are
converging toward US and Canadian levels.
90%
80%
70%
60%
Canada
50% U.S.
40% Mexico
30%
20%
10%
0%
Oct/93
Oct/96
Oct/99
Oct/02
Oct/05
Abr/98
Abr/04
Abr/95
Abr/01
Ene/93
Ene/96
Ene/99
Ene/02
Ene/05
Jul/94
Jul/00
Jul/03
Jul/97
1 month rates
Source: INEGI, Federal Reserve System & Bank of Canada.
6

8. Is Mexico a North American Economy?
Yield Curve
Moreover, the financial markets have deepened, as is evidenced by the
evolution of the yield curve.
90% Mar-95
80%
70%
60%
50%
Jan-95
40%
30%
Jan-00 May-00
20%
Apr-03 May-04
10% Feb-07
0%
3m 1yr 3yr 5yr 10yr 20yr 30yr
Source: Banco de México
7

9. Mexico is a North American Economy
II. Is Mexico a BRIC?

10. Is Mexico a BRIC?
Large Economies, 2004
(data in billions of USD)
China ($1,932) Argentina ($153)
India ($691) Malaysia ($118)
Mexico ($677) Venezuela ($110)
Brazil ($604) Czech Republic ($107)
Russia ($581) Hungry ($101)
Turkey ($303) Colombia ($98)
Indonesia ($258) Pakistan ($96)
Saudi Arabia ($251) Chile ($94)
Poland ($242) Algeria ($85)
South Africa ($213) Filipinas ($85)
Iran ($163) Egypt ($79)
Thailand ($162)
Is understood by Large Economies, those whose GDP are above 75 billions of USD in 2004.
Source: ALTA Growth Capital with data from the World Bank.
9

11. Is Mexico a BRIC?
Population over 50 million, 2004
Population GDP GDP per
(million) (billion US$) capita
China 1,296 $1,932 $1,491
India 1,079 $691 $640
Indonesia 217 $258 $1,189
Brazil 183 $604 $3,301
Pakistan 152 $96 $632
Russia 143 $581 $4,063
Mexico 103 $677 $6,573
Philippines 81 $85 $1,049
Egypt 72 $79 $1,097
Turkey 71 $303 $4,268
Iran 67 $163 $2,433
Thailand 63 $162 $2,571
South Afr. 45 $213 $4,733
Colombia 44 $98 $2,227
Argentina 38 $153 $4,026
Poland 38 $242 $6,368
Algeria 32 $85 $2,656
Venezuela 26 $110 $4,231
Malaysia 24 $118 $4,917
Saudi Ar. 23 $251 $10,913
Chile 16 $94 $5,875
Czech Reo. 10 $107 $10,700
Hungary 10 $101 $10,100
Source: ALTA Growth Capital with data from the World Bank.
10

12. Is Mexico a BRIC?
Goldman Sachs Growth Environment Score*
China (5.0)
Thailand (4.7)
Mexico (4.6)
Russia (4.2)
Iran (4.1)
Egypt (3.9)
Brazil (3.8)
Philippines (3.8)
India (3.7)
Turkey (3.5)
Indonesia (3.4)
Pakistan (3.2)
*Variables include inflation, government deficit, external debt, investment rates, openness of economy, penetration of phones, penetration of
PC s, penetration of Internet, average years of secondary education, life expectancy, political stability, rule of law, and corruption; mostly using
2002 and 2003 data.
Source: ALTA Growth Capital with data from the World Bank. 11

13. Is Mexico a BRIC?
Comparative indicators
Emerging markets
Criteria
Brazil Mexico India China Russia
Market Size
Population (millions) 178.7 103.8 1,079.7 1,296.5 142.8
Surface Area (sq Km million) 8.5 2.0 3.3 9.6 17.1
Technology
High-Tech Exports (% of manufactured exports) 11.6 21.2 4.9 29.8 9.1
Fixed line & Cell phone subs (per 1,000 people) 587.2 544.6 84.5 499.4 508.3*
Internet Users (per 1,000 people) 119.6 135.2 32.4 72.5 111.2
Economic Indicators
GDP (US$ billion) 604.0 676.5 688.7 1,653.8 581.4
GNI (US& billion) 551.6 704.9 672.8 1,672.5 488.5
Inflation (annual %) 8.2 6.1 5.3 6.9 18.1
Exports (fob US$ million) 81,466.0 189,159.0 76,345.0 593,369.0 183,452.0
Imports (fob US$ million) 62,809.0 197,247.0 99,836.0 561,423.0 100,193.0
Unemployment Rate (%) 8.3 2.8 8.8 N/A 7.9
International Reserves -2005 E (US$ billion) 27.8 68.7 N/A N/A N/A
Entrepreneurship
Time required to start a business (days) 152.0 58.0 89.0 48.0 36.0
Trade Barriers Hgh Low Med-Low High Med-High
Difficulty to transfer cash to the US Hgh Low Medium High Med-High
Degree of Gov intervention in economy Hgh Medium Medium High Med-High
Political Stability Index (US=100) 60.0 80.0 70.0 N/A 50.0
Foreign Policy/Relations w/ US 60.0 80.0 80.0 60.0 50.0
Political Regime Democratic Democratic Democratic Socialist/Comm Democratic
Human Rights & Social Factors
Poverty (% of Pop below poverty line) 22.0 18.0 29.0 5.0 21.0
Literacy Rate (% of pop age 15+) 88.6 91.0 61.0 90.9 99.4
Infant Mortality (per 1,000 live births) 33.0 23.0 65.0 30.0 16.0
Trade Agreements Mercosur NAFTA N/A N/A N/A
Nuclear Threat Low Low Low Hgh Low
*As of 2003. Data for 2004 not available.
Source: ALTA Growth Capital with data from the World Trade Bank, Amnesty International, Latin Trade Magazine, IDC, and Core Strategies. 12

14. Is Mexico a BRIC?
Convergence
After China, Mexico is the most likely among the developing
economies to converge to developed country income levels.*
GES Index Mexico Brazil Russia India China
Macroeconomic Stability
Inflation 7 12 10 5 1
Government Deficit 2 11 1 12 7
External Debt 4 10 8 3 2
Macroeconomic Conditions
Investment Rate 7 12 9 6 1
Openness of economy 6 9 5 12 2
Technological Capabilities
Penetration of PCs 2 4 1 11 7
Phones 6 3 2 9 5
Internet 1 3 6 11 5
Human Capital
Education 3 13 1 12 6
Life Expectancy 1 7 10 12 2
Political Conditions
Political Stability 4 3 9 7 2
Rule of Law 5 4 9 3 6
Corruption 4 1 9 5 6
General Index 2 7 4 9 1
*Excludes Korea.
Goldman Sachs Overall Convergence Index as reported in How Solid are the BRICs, Global Economics Paper 134, GS, Dec. 2005
The number in the table indicates the place in which each country ranks in the individual components of the General Convergence Index
among the BRICs and Next Eleven, excluding Korea. Highlighted in red are scores below the mean. 13

15. Mexico is a BRIC
III. Challenges: Short Term

16. Challenges: Short Term
Inflationary Bubble
The inflationary bubble forming in these first weeks of 2007 may
modify the perception of the economic evolution in the short term.
Inflation
Inflación
6.0%
5.5%
5.0%
4.5%
4.0%
?
3.5%
3.0%
2.5%
2.0%
1Q Oct 2006
2Q Nov 2004
1Q Nov 2003
1Q Abr 2004
2Q Abr 2005
2Q Ago 2003
2Q Jun 2004
1Q Jun 2003
1Q Dic 2005
2Q Dic 2006
1Q Jul 2005
2Q Jul 2006
2Q Ene 2004
1Q Ene 2003
1Q May 2006
1Q Feb 2005
2Q Feb 2006
2Q Mar 2003
1Q Sep 2004
2Q Sep 2005
Source: Banco de México & CEESP.
15

17. Challenges: Short Term
Economic Expectations 2007
Indicator Expectation 07
General Inflation 3.50%
Underlying Inflation 3.30%
Cetes rate (28 days) 6.86%
Exchange rate at the end of the year (pesos for 11.23
USD)
Mexican real GDP variation 3.49%
Real variation in private sector consumption 4.00%
Real variation in private sector investment 5.80%
Real variation in public sector consumption 2.10%
Real variation in public sector investment 4.80%
US real GDP variation 2.54%
Economic balance of the public sector Deficit de 0.07%
Commercial deficit (millions of USD) 10,148
Current account deficit (millions of USD) 8,645
Non-oil exports variation 8.49%
Oil exports variation -4.24%
Source: Survey about the
Expectative from the private Imports variation 8.85%
sector economic Average price level for Mexican crude oil (USD per 48.58
specialists: December barrel)
2006, Banco de México.
Foreign direct investment (millions of USD) 15,999
16

18. Challenges: Short Term
Public Finance
The price of Mexican crude oil has experimented in the last few months
significant and consistent reductions. Moreover, in the absence of new
exploration, the oil reserves will continue to decrease at increasing rates.
Daily evolution of the price of
Mexican crude oil
65.0
62.5
60.0
57.5
USD/Barril
55.0
52.5
50.0
47.5
45.0
42.5
40.0
15/Oct/06
30/Oct/06
18/Abr/06
14/Nov/06
03/Abr/06
29/Nov/06
01/Ago/06
16/Ago/06
31/Ago/06
14/Dic/06
29/Dic/06
02/Jun/06
17/Jun/06
02/Jul/06
17/Jul/06
13/Ene/07
18/May/06
03/May/06
15/Sep/06
30/Sep/06
Source: Banamex.
17

19. Challenges: Short Term
Public Finance
Oil Stabilization Fund
In case of a reduction of the crude oil revenues associated with a decrease
in the weighted average price of the barrel ( ) or a movement in the peso-
US dollar exchange rate, below the threshold estimated in the Revenues
Law, the (SHCP Treasury Secretariat) will dictate the terms to
compensate such decreases with resources from the Fund for
Stabilization of Crude Oil Revenues .
In case of reaching the fund s resources limit without compensating the full
revenues decrease, budget adjustments will be applied in the following order:
1. Communication and publicity expenses
2. Administrative expenses not directly linked with service to the general
population
3. Expenses in personal services, with priority to any expenditure related to
extraordinary issues
4. Budget savings and adjustments which are determined by all
dependencies and entities in their authorized budget schedules
Source: Ley Federal de Presupuesto y Responsabilidad Hacendaria.
18

20. III. Challenges: Long Term

21. Challenges: Long Term
Openness
The degree of openness of the Mexican economy has
dramatically increased. But it begins a perception of stagnation.
X+M
Degree of Openness
PIB
70%
53.32%
60% ?
50% 30.43
21.70%
40%
30%
20%
Closed
Cerrado
Clos ed GATT
GATT NAFTA
TLCAN
NAFTA
10%
0%
1984
1988
1980
1981
1982
1983
1985
1986
1989
1994
1998
2004
1987
1990
1991
1992
1993
1995
1996
1999
2000
2001
2002
2003
2005
1997
Source: Banco de México.
20

22. Challenges: Long Term
Trade
Since the signing of NAFTA, Mexican non-oil exports have shown
significant growth; however, they also show signs of stagnation.
Evolution of Mexican non-oil exports
225
TLCAN
NAFTA
Miles de millones de USD
200
175
181.8
150
125
100
75
50
25 44.2
7.6
0
1984
1988
1980
1981
1982
1983
1985
1986
1989
1994
1998
2004
1987
1990
1991
1992
1993
1995
1996
1999
2000
2001
2002
2003
2005
1997
Fuente: Banco de México.
21

23. Challenges: Long Term
Investment
Foreign direct investment has also had a dramatic increase as a result of
NAFTA. Stagnation is again noticeable.
Foreign Direct Investment
30,000
25,000
Millones de dólares
20,000
15,000 15,489
10,000
5,000 3,468
1,299
0
1984
1988
1980
1981
1982
1983
1985
1986
1989
1994
1998
2004
1987
1990
1991
1992
1993
1995
1996
1999
2000
2001
2002
2003
2005
1997
Closed
Cerrado GATT GATT y TLCAN
GATT & NAFTA
2001 includes Citigroup s acquisition of Banamex ($12.5 billions of dollars).
Source: Ministry of Economy 22

24. IV. Recommendations

25. Recommendations
A BRIC in North America
§ Legal and institutional framework needs to be strengthened
§ Macroeconomic stability needs to be reenforced
§ Labor
ü Labor reform needs to be encacted
ü Migration agreement with the US needs to be reached
§ Competition
ü Private monopolies need to be broken up
ü Public monopolies especially Electricity and Oil need to be
privatized
§ Energy reform
ü Public monopolies especially Electricity and Oil need to be
privatized
ü Private sector investment in alternative enegies needs to be allowed
§ Infrastructure and logistcs needs to improve with public and private
investment
24