Mexico Risk & Balance of Payment Analysis

Mexico Risk & Balance of Payment Analysis

Michael Matt

International Finance

Dr. Benedicte Reyes

3 March 2016

TABLE OF CONTENTS

                                                                                         Page

Title Page                                                                          1

Table of Contents                                                                   2

1. Introduction                                                          3
2. Country Risk                                                                         3-4
3. Balance of Payments                                                   5-6        
4. Conclusion                                                          7
5. Reference                                                          8
6. Works Cited                                                          9

Introduction

        Mexico has one of the world’s largest economies, and is considered a strong power

among the Latin American countries, and an emerging power globally. The economy of Mexico

is strongly linked to the other nations in the North American Free Trade Agreement, most

notably the United States, who is the main trading partner of Mexico. However, Mexico

economy has been weakened by corruption scandals, high crime rates, and low public revenues

linked with oil which are notable risks that foreign investors might be alarmed by. Despite this,

although the peso continues to decline, Mexico may be a viable option for foreign investors, as

the low exchange rate allows for a cheap and attractive investment, and growth in the Mexican

stock market indicates the potential for notable returns to investors.

Country Risks

        Geographically close to the North American Market, Mexico has a relatively acceptable level of risk. According to the Country Risk Rating Scale, Mexico rates as an A4, which is acceptable risk (Table 1) However, Mexico has dealt with some shaky political and economic outlooks and has a largely unpredictable business environment that is based off the state of the US economy.

Sovereign Risk:

        As of December 2015, Mexico was given a BB rating in Sovereign Risk. The contributory factors that have led to this rating are a widening of Mexico’s fiscal deficit and a rising public debt/GDP ratio. which is up to almost 45%. Furthermore, low oil prices have been limiting revenue growths and there will be necessary budget cuts in 2016 to prevent the country’s deficit from widening.

Currency Risk:

        Following two relatively stable months, the peso weakened again in December-January. However, despite the Peso’s recently volatile history, the Peso will gather support by investors who are confident in Mexico’s macroeconomic policies, positive future outlook of US economy, and greater competition and investment within key sectors of Mexico’s economy.

Banking Sector Risk:

        Despite a still-weak economy, the financial outlook of Mexico remains relatively good. This is due in large part to strong regulations and solid capital. Furthermore, a new banking reform is expected to be implemented, which will help improve credit availability as well as open more access to financial services.

Political Risk:

        Mexico has had a long history of political issues which are still prevalent in the country today. Drug-related violence continues to be a major risk to Mexico, as it’s government has been unable to curtail the issue. Furthermore, Mexico has recently gone through some major political crises such as corruption and security-related scandals, which must be addressed by the government. While the Institutional Revolutionary Party remains the majority in the lower house, the government will still be plagued from these institutional weaknesses.

Economic Structure Risk:

        As mentioned, contributing factors to Mexico’s weak economic structure are a high level of dependency on oil revenue and susceptibility to the United States economic markets. Investors interested in trade and diversified investments will see returns, however only in the long-run. Furthermore, the dependency on oil and its weak prices will reduce investors interest in energy investments.

Balance of Payments

Central bank figures show that in the past year Mexico’s current account deficit had swelled to its largest in 20 years. The current account deficit continued to widen to $32.38 billion from $24.85 billion in 2014, which would be the largest since 1995. Measured as a proportion to GDP, it rose to 2.8 percent, which is the largest since 1998. As of the forth quarter of 2015, Mexico recorded a Current Account deficit of $7.69 billion, continuing to add to the annual deficit. Over the past 5 years, figures have indicted that the deficit in the current account in Mexico will continue to increase. In 2012, deficit remained below $5 billion. However, in 2013 deficit’s increased to over $8 billion, with the highest reaching $9.55 billion in 2014 and roughly swung between $6 billion to $8 billion each quarter (Table 2).  In 2015, however, the deficit had maintained close to, if not over, $8 billion, so future indicators suggest that the quarterly deficits will continue to rise.