Despite the fact that the majority of the news we hear about Mexico from the media these days are related to the war on drugs or immigration, there is another side of things that is making many investors turn their heads back at Mexico, the economy is growing and it is growing fast.

While drug related violence is in fact a major detriment to the country’s outlook, its economy has reached a solid pace of growth for the last decade, largely driven by international trading that has sustained growth rates at about 4% every year and projecting similar growth levels for 2013.

Speaking of international trading, let’s focus on exports for a minute. Over the last year Mexico became the world's largest exporter of flat-screen televisions and the fourth’s larger automobile exporter in the world, with companies like Nissan, Lincoln, BMW and Audi opening facilities or expanding on existing plants. You may wonder how these (among many other) industry sectors are growing so fast; the reality is that a combination of several factors has contributed to such prowess.

While many materials and components for these and other manufacturing industries come from Asia, Europe and other regions in the world, final assembly is completed in Mexico. Some 80% of Mexican exports are shipped to the United States mainly because of the North American Free Trade Agreement which allows products assembled in Mexico to enter the United States for free. Items imported from China or Asia are typically subject to taxes, fees or import tariffs that increase the cost of the goods, which makes the Mexican marketplace much more attractive.

While free-trade is one of the fundamentals of “Nearshoring”, location, is by definition another key element. In todays’ global economy, even when any product can be bought and shipped anywhere, the fact Mexico is located next to the largest consumer market in the world doesn’t hurt. Lower freight and logistics costs and shorter transit times are becoming a priority for many businesses that want not only to reduce costs but to improve efficiency on their processes. These two ingredients alone, have some analysts projecting that in less than a decade, the U.S. will import higher volumes from Mexico than from China.

The third ingredient to this equation involves resources and adequate financial planning. State-owned PEMEX, the world eight-largest oil producer in the world by output, recently announced the discovery of an oil deposit with a size that could provide about 500 million barrels with another 500 million barrels estimated to lie in the nearby areas, which represents the largest oil discovery made in the country in the last 10 years. Newly proposed partnerships that allow the company to be receptive to private investments have been proposed, which are expected to foster government revenues.

Lastly, improvements on financial regulations have maintained the country’s economic situation in a solid position to withstand the global economic crisis, Mexican president Calderon recently stated that “While in the United States, the crisis started in the financial markets, in Mexico the financial sector was not part of the problem but part of the solution”, the reality is that banks in Mexico have been able to double their projections on capitalization and many of them will be fully implementing Basel III standards early next year, well ahead those of other countries including China and even the US.

At this rate and despite the cost that crime and violence has over the economy, some projections indicated that Mexico may overtake Brazil as the largest economy in Latin America and will become the fifth largest economy in the world within the next decade. We’ll see.
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Diego De la Garza

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