Economic Vitality on the Horizon
Challenges and Opportunities from the Perspective of Mexico’s Private Sector
Article provided by A.T. Kearney
While the worst of the 2008 recession appears to be over, the capacity of governments across the globe to handle debt burdens will continue to have huge implications for future economic vitality. Countries will need to navigate in an increasingly complex and volatile international political and economic environment.
Mexico is no exception to these recovery challenges. In fact, the country was particularly hard hit by the global economic downturn, largely due to its close ties to the United States. To make matters worse, Mexico’s declining oil production is having serious fiscal and trade implications. Indeed, the federal government’s dependence on oil revenues from Pemex can only be reduced by ramping up its offshore drilling again. The government relies on the oil industry for 40% of total revenues yet analysts expect that Mexico may cease exports by 2015.
Key traits indicate recovery, bright future
But there is good news for Mexico as well. Despite facing a long, arduous path to recovery, the country ultimately will benefit from the dramatic changes that have impacted the world’s economic landscape. And as it rebounds from the recession, the middle class will recover, too.
Global economic activity was already moving from the developed to emerging markets prior to the 2008 Great Recession. The global downturn served to accelerate what is nothing short of a fundamental shift in global production and consumption. Indeed, as Mexico recovers from serious economic shocks, it finds itself possessing a favorable mix of traits that indicate the potential for robust, long-term growth:
This mix of qualities has given Mexico some clear advantages, including:
• Beyond NAFTA, Mexico became the first Latin American country to have preferred access to the EU through a Free Trade Agreement
• Non-BRIC emerging markets in the G20, such as Mexico, will outpace BRIC economies such as Russia and Brazil in many important respects (see figure 1)
• Higher energy costs and rising wages in China have started to create a near-shoring opportunity for Mexico
Offshoring power player
A.T. Kearney’s Global Services Location Index (GSLI), an annual study that analyzes and ranks the top 50 countries for outsourcing activities, ranked Mexico 11th in terms of IT & BPO attractiveness. Regionally, Mexico already has the second highest position among American near-shore IT and BPO options (see figure 2) and its combination of financial attractiveness, people skills/ availability, and business environment will only get stronger in the next five years.
In one year, Mexico also jumped from 19th to 8th in the A.T. Kearney FDI Confidence Index, reflecting positive investor intentions. The Index, which reveals significant strengths in light industry and the near shoring interest of North American investors, is a survey that collects information from respondents around the world, 38% of whom are CXOs.
Significant opportunities exist in near shoring to the United States, especially in light industry, such as electronics, but also in the automotive as well as the IT and BPO services industries.
Growing resource pressures will also benefit the country in the longer term-assuming it can align its production.
Erik Peterson is Managing Director of A.T. Kearney’s Global Business Policy Council, a strategic advisory service specifically designed for the world's top CEOs and business-minded thought leaders.