While FSG clients continue to view the Mexican economy as a source of opportunity, revenue growth came in under expectations in the first quarter, and targets for 2013 reflect lower expectations than in previous years. That said, executives remain relatively optimistic about the potential for stronger growth in the second half of the year, contingent upon accelerated government spending and investment in infrastructure, progress on the structural reform front, and continued economic recovery in the US.
From a macroeconomic perspective, manufacturing exports, the troubled construction sector, and stalled government procurement proved to be significant drags on growth in recent months. Additionally, Mexican consumer and producer confidence declined during H1, and the pace of consumption and credit growth have moderated, reflecting the impact of sluggish external demand, falling remittances, currency depreciation, and inflationary pressures on domestic sentiment and purchasing power.
Broadly speaking, Mexico’s near-term prospects remain highly contingent upon US economic performance, although Peña Nieto’s commitment to accelerating investment in infrastructure and pushing through fiscal and energy reform also has the potential to drive growth and foreign direct investment in the months ahead.
It is against this economic backdrop that FSG believes multinationals should be tracking the following three trends during the third quarter of this year as an indication of how the business environment is likely to evolve over the medium term:
- Ramping up of government spending under the new administration
- Recent developments: During the first quarter of 2013, government expenditure fell short of budgeted amounts by 4.9% in Q1. This slowdown, while common in Mexico during periods of political transition was a key driver of Mexico’s underperformance during the first half of the year.
- Forecast: Our expectation is that government spending will accelerate in the second half of the year. Companies in the construction sector stand poised to benefit as infrastructure projects are prioritized.
- Near-term exchange rate volatility
- Recent developments: In recent weeks, the peso has depreciated sharply against the US dollar amid speculations that the Fed will begin to wind down bond purchases as the US economy continues to improve.
- Forecast: Over the long term, recovery in the US bodes well for Mexico. As such, near-term capital outflows should be interpreted as a reaction to the shift in US monetary policy rather than perceived weakening of Mexican fundamentals.
- Healthcare reform efforts will emphasize preventive care
- Recent developments: In addition to pushing for reduced costs and expanded access to healthcare services, Peña Nieto has indicated that preventive care will be prioritized when healthcare reforms are rolled out.
- Forecast: Companies in the pharmaceutical, medical device, and consumer goods spaces should consider low-cost, high impact ways to proactively align their marketing, government relations, and product development strategies with government efforts to reshape consumer behavior and promote a healthy lifestyle.
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