Will there ever be an M in the BRICs

Transcription

1 Will there ever be an M in the BRICs Jorge O. Mariscal Chief Investment Officer, Emerging Markets UBS Wealth Management, AG * Presentation to the Conference: U.S.-Mexico 2012: A Year of Presidential Elections UNITED STATES-MEXICO CHAMBER OF COMMERCE CÁMARA DE COMERCIO MÉXICO-ESTADOS UNIDOS The author is a Board Member of the US-Mexico Chamber of Commerce April 2012

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3 Does Mexico belong with the BRICs? It could almost qualify by the size of its economy, population and GDP per capita BRICs vs Mexico (2011E values) Source: WEO and TRG calculations 2011 GDP Population GDP/ Pop Country ($bn) (mm) (usd) Brazil 2, ,917 Russia 1, ,236 India 1,843 1,207 1,527 China 6,988 1,348 5,184 BRIC Median 2, ,050 Mexico 1, ,803 Mexico/ BRIC 54% 16% 119% 2

4 But Mexico has fallen short in economic growth, especially since 2000 Historical and projected economic growth of the BRICs and Mexico Country F 2012F Brazil 8.4% 3.0% 1.7% 3.7% 2.7% 2.9% Russia % 5.3% 4.3% 3.5% India 2.7% 5.7% 5.6% 7.4% 6.7% 7.3% China 6.1% 9.7% 10.0% 10.3% 9.2% 8.5% BRIC 5.2% 6.4% 5.5% 7.9% 5.7% 5.6% Mexico 6.4% 2.3% 3.4% 2.2% 3.9% 3.8% Latin America 6.6% 2.3% 2.7% 3.5% 4.8% 4.0% Emerging Asia 5.9% 8.0% 7.8% 8.1% 6.7% 6.4% EMEA 2.0% 1.5% -0.5% 4.5% 4.4% 3.1% Emerging Markets 5.2% 5.3% 4.9% 6.3% 4.0% 3.4% *GDP weighted 2011 Source: WEO, UBS Consensus Economics (2012) and TRG calculations 3

5 Mexico has done well on the inflation front, especially in the 2000s Historical and projected inflation of the BRICs and Mexico Country F 2012F Brazil % 854.8% 6.9% 6.5% 5.4% Russia % 14.0% 8.5% 4.9% India - 9.1% 9.6% 5.5% 8.3% 6.8% China - 7.5% 7.8% 1.9% 5.4% 3.5% BRIC % 204.0% 5.2% 7.2% 5.2% Mexico % 20.4% 5.2% 3.7% 3.8% Latin America 17.2% 251.3% 456.6% 7.1% 6.4% 5.9% Emerging Asia 4.4% 11.7% 7.8% 3.1% 5.4% 3.9% EMEA 8.1% 25.5% 115.4% 11.5% 6.9% 6.2% Emerging Markets 8.1% 70.1% 133.9% 5.8% 6.2% 5.3% *GDP weighted 2011 Source: WEO and TRG calculations 4

6 Mexico s government balance sheet is solid and better than Brazil s and India s 250% Gross Government Debt (% of GDP) 200% % 100% 50% 0% 5 Japan Italy United States Singapore Canada Germany United Kingdom Hungary Israel Brazil India Poland Norway Malaysia Switzerland Philippines Denmark Venezuela Argentina Thailand Mexico Czech Republic Turkey Taiwan South Africa Sweden Colombia Hong Kong South Korea China Indonesia Australia Peru Russia Chile Source: WEO and TRG calculations

7 And external deficits are smaller than Brazil s and India s 30% 25% 20% 15% 10% 5% 0% -5% -10% -15% Current Account Balance (% of GDP) 6 Malaysia Turkey Poland Czech Republic South Africa Peru Colombia Brazil India Mexico Argentina Chile Indonesia Israel South Korea Philippines Hungary Thailand China Hong Kong Russia Venezuela Taiwan Singapore Source: WEO and TRG calculations

8 Which has earned Mexico a stable credit rating above that of Brazil and India Credit Ratings 2012 Ratings S&P Fitch Moody's Rank Brazil BBB BBB Baa2 4 China AA- A+ Aa3 1 India BBB BBB- Baa3 5 Mexico BBB BBB Baa1 2 Russia BBB BBB Baa1 2 Source: Bloomberg. Data as of February 7,

9 How about other indicators? Mexico needs to improve quality of education and spend more on R&D Public spending on education, total (% of GDP) School enrollment, secondary (% gross) Research and development expenditure (% of GDP) Patents: Patents per capita Brazil , China , India , Mexico Russia , Source: WDI, NBS and TRG calculations. R&D data for 2006 and

10 Mexico s infrastructure base is not bad but related spending is not enough Infrastructure spending (% GDP) Vietnam 99 Internet users (per 100 people) Mobile cellular subscriptions (per 100 people) Rail/sq km Paved roads/total road Brazil % 6% China % 53% India % 49% Mexico % 35% Russia % 80% India China Thailand Turkey Poland Russia Brazil China India Russia Mexico Infrastructure (usd bn) ,505 3, Electricity 58.7% 81.2% 45.4% 32.8% 51.1% Mobile 23.8% 12.0% 44.0% 44.3% 21.0% Road 5.8% 5.2% 9.4% 14.3% 21.3% Fixed line 1.2% 0.8% 0.2% 0.6% 1.5% Rail 2.8% 0.3% 8.9% 8.2% 5.1% South Korea 22 Mexico 15 Brazil Source: WDI, RBC and TRG calculations. Internet user data for 2008 and mobile cellular subscriptions for

11 Mexico has 17% of China s GDP middle class but half the size of China s Country China Mexico 2011 GDP ($bn) 6,988 1,185 Population (mn) 1, GDP per capita (usd) 5,184 10,803 Middle class $19K+ per year Source: Bloomberg, Central Banks and TRG Management LP calculations 10

12 It fares poorly in crime rates and elevated corruption perceptions Homicide rate per 100, INEGI SNSP* *SNSP: Sistema Nacional de Seguridad Pública Homicides Rank per 100,000 (lower=worse) **Estimación 5º Informe de Gobierno Corruption Perception Index (higher=worse) Brazil China India Mexico Russia Source: WDI, Corruption Perception Index and TRG calculations. Ease of doing business rank data for 2011, Homicides for 2011 and corruption perception index for

13 Still, Mexico ranks well as a place for doing business Ease of Doing Business Rank 2011 (higher=worse) Brazil 120 China 87 India 139 Mexico 54 Russia 124 Starting a Business - Rank Dealing with Construction Permits - Rank Getting Electricity - Rank Registering Getting Credit - Property - Rank Rank Protecting Investors - Rank Paying Taxes - Rank Trading Across Borders - Rank Enforcing Contracts - Rank Resolving Insolvency - Rank Brazil China India Mexico Russia *higher rank=worse Source: World Bank Ease of doing business rank data for 2011, Homicides for 2011 and corruption perception index for

14 All good but global crisis Mexico showed greater vulnerabilities in the recent GDP Growth Country 2009 China 9.2 India 6.8 Indonesia 4.6 Poland 1.6 Colombia 1.5 Philippines 1.1 Peru 0.9 Argentina 0.8 South Korea 0.3 Brazil -0.6 Singapore -0.8 Malaysia -1.6 Chile -1.7 South Africa -1.7 Taiwan -1.9 Thailand -2.4 Hong Kong -2.7 Venezuela -3.2 Czech Republic -4.1 Turkey -4.8 Mexico -6.2 Hungary -6.7 Russia -7.8 Source: WEO 13

15 Mexico, so far from God so close to the US Mexican Remittance and US Homebuilders Mexico and US manufacturing output Mexico and US manufacturing output %3m/3m, saar Mexican Remittances rolling 12m (bn) US Homebuilders Index (rhs) Mexico US Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Source: INEGI and FRB. 20 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 0 Source: INEGI, FRB and Bloomberg. 14

16 Mexico has a low tax base and its budget depends 1/3 on oil revenues 2011 Total Revenue (% GDP) Brazil 38.5 China 21.8 India 21.3 Russia 30.9 Mexico Other 66% Mexico Oil Revenues 34% Source: Moody s and Secretaria de Hacienda y Credit Publico. 15

17 While FX reserves are at historical high they are still low by BRIC standards 150,000 Mexico FX Reserves (USD mn) 140, , , , ,000 90,000 80,000 70,000 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 FX Reserves (bn) FX Reserves (%GDP) Country Dec-07 Dec-12 Dec-07 Dec-12 China 1,530 3,181 44% 46% Russia % 25% Brazil % 14% India % 15% Mexico % 12% Mexico (FCL) % 18% Source: IMF, WEO and TRG calculations. 16

18 FX reserves look small relative to the openness of the economy FX Reserves (% Imports) Source: IMF and TRG calculations. 17 China Russia Brazil Peru Israel Philippines Thailand Singapore India Hong Kong Colombia Malaysia South Korea Indonesia Argentina Hungary Chile Poland South Africa Mexico Turkey Czech Republic Venezuela

19 Private sector external debt has declined from 2007 but it is considerable Emerging economies private sector external debt short and long term 600% 500% 2011Q2 2007Q4 400% 300% 200% 100% 0% 18 Chile Turkey Czech Rep. Hungary Poland Colombia Mexico South Africa Korea Israel Russia India Indonesia Argentina Brazil Malaysia Peru Thailand Philippines China Source: IMF and TRG calculations.

20 Exposure to global bank deleveraging is also high 600% Claims of BIS reporting banks as percent of FX reserves 500% 400% Somewhat exaggerated by presence of Spanish banks locally 300% 200% OTHER 2011Q2 US 2011Q2 EU 2011Q2 100% 0% 19 Czech Republic Chile Poland Mexico South Africa Hungary Turkey Venezuela Hong Kong Brazil Singapore Colombia South Korea Malaysia India Peru Indonesia Argentina Taiwan Philippines Thailand Russia Israel China Source: BIS

21 Encouraging news on the recovery but Mexico s economic fate is tied to the US Industrial Production (3m avg) Mexico US 5 YoY %chg Source: Bloomberg and TRG calculations. 20

22 Mexican growth will likely underperform the BRICs couple of years in the next 2010 GDP Growth Inflation Brazil Russia India China BRICs Mexico Latin America Emerging Asia EMEA Emerging Markets Source: Consensus Economics and UBS 21

23 And the government has now less room to spend than it did in % 10% Fiscal Balance (% of GDP) % 0% -5% -10% -15% 22 Singapore Sweden Korea Peru Hong Kong Chile Argentina Taiwan Canada Indonesia China Mexico Turkey Brazil Colombia Venezuela Thailand Hungary Russia Philippines Australia Germany South Africa Czech Rep. Romania Italy Malaysia Poland India UK Japan US Source: WEO

24 The peso remains susceptible to shocks ELMI+ (Jan 2005=100) ELMI+ LatAm Mexico Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Source: Bloomberg, JP Morgan and TRG calculations Currencies Drawdown 2011 Peak to trough Peak to today Mexico -16% -9% India -13% -8% Brazil -11% -5% Russia -6% -4% China -1% 1% *5/2/11-11/25/11 *5/2/11-1/19/12 23

25 July 2012 elections: an adolescent democracy and political risk still matters Presidential race: vote intentions February % 22.2% 18.5% Source: Ipsos Bimsa 24

26 There is an interesting recent trend in the largest Latin American economies? 25

27 What about the long term? If Mexico avoids recurrent crises and continues along its current path it will be the world s 6th largest economy by 2050 Source: Goldman Sachs 26

28 But Mexico would be still smaller than the BRICs Nominal GDP (USD billion) 2011 Base Growth Rate for Mexico 2050 Mexico, $6,947 India, $1,843 Mexico, $1,185 India, $24,984 Russia, $1,885 Russia, $8,011 Brazil, $2,518 China, $6,988 Brazil, $9,713 China, $52,619 Source: Goldman Sachs 27

29 So how can Mexico get the incremental growth needed? Answer: reduce vulnerabilities and bring about structural reforms! 0.5% more GDP growth per annum? 28

30 A mere 0.5% growth in GDP per year over 40 years means: Projections for Mexico in Base High Difference GDP Growth 4.0% 3.3% 3.8% 0.5% FX contribution -8.3% 1.6% 1.8% 0.2% Average Annual GDP Growth 4.9% 5.6% 0.7% GDP (USD bn 2010) 1,185 6,947 9,186 2,239 Per Capita GDP 10,803 48,268 81,003 32, % p.a. over 40 years = 2.2X a full Mexican economy of today = 3X the current per capita income Source: Goldman Sachs and TRG calculations 29

31 It also means full membership in the BRIC club $60,000 $50,000 GDP projections in 2050 (USD bn in 2010) $100,000 $90,000 $80,000 GDP per capita projections in 2050 (USD) $40,000 $30,000 $70,000 $60,000 $50,000 $20,000 $10,000 $40,000 $30,000 $20,000 $0 China US India Brazil Mexico "high" Russia Japan UK France Germany Canada Italy $10,000 $0 US Mexico "high" Canada UK France Germany Japan Russia Italy Brazil China India Source: Goldman Sachs and TRG calculations 30

32 Challenges and prognosis Mexico needs to lower vulnerabilities and increase growth External Challenges A slow protracted recovery in the US Europe s likely recession/risk aversion Internal Challenges Political resistance to structural reform Oligopolistic economies Government dependence on oil revenues Fight on crime Inequality and large poverty Prognosis The bad news is that the challenges are large The good news is Markets expect a lot from the BRICs and too little from Mexico Do not count Mexico out 31

33 One last problem: where do we put the M? CRIMB BRICM? BRIMC? CRIBM? MICRB???? RICMB? Ok, we will leave it to the marketing geniuses of Goldman Sachs to come up with a new catchy name. 32