Under the sombrero of NAFTA, the amigo that is expected to have the lowest gross domestic product growth rate this year is Mexico (-7.0%). Many factors outside that country’s control have conspired to bring the economy down. However, there are also some internal issues that are causing grief, as well. Let’s look at the negatives first and then conclude by considering the positives, which are still decidedly in Mexico’s favor.

On the downside, (1) much of Mexico’s industrial output is tied to a United States economy that is in deep recession. Furthermore, Mexico has major stakes in sectors of the U.S. economy – motor vehicles and construction (i.e., the housing sector) – that are among the worst performing.

(2) Mexican labourers, legal and illegal, are finding it harder to cross into the U.S. When they do make it past the border, work is harder to find. Besides the recession, measures have been taken at the state level to discourage hiring itinerant workers. Also, remittances being sent back home by Mexican workers are falling way short of past levels.

(2) Tourism from around the world normally provides a big boost to the Mexican economy. First, foreign travel was harmed by the global recession. Then it was devastated by the outbreak of the H1N1 virus, initially knows as swine flu, due to an early case of this animal-human crossover appearing on a Mexican pig farm.

(3) Mexican oil production, much of which goes to the U.S., is in decline due to notoriously poor management by the state-owned major producer, Pemex. New reserves have neither been found nor developed and improved technology to extract more from existing fields has not been implemented. Measures to open up the industry to foreign expertise keep failing for political reasons. 

(4) One international perception of Mexico is that it has become a virtual narco-state, run by drug lords. The combination of kidnappings, violence and a corrupt police force is providing a disincentive to foreign investment. The army is being used to assert control in a number of border regions.

(5) There is an inadequate tax structure to support the central government. There is too much reliance on oil royalties, which are failing. The opposition party − the Institutional Revolutionary Party (PRI), which ruled for many decades prior to 2000 − has just won the mid-term elections. This will make it harder for President Felipe Calderón of the National Action Party (PAN) to govern. He came to power on a law-and-order ticket. The PRI, by way of contrast, has a history of making accommodations with drug traffickers.  

The foregoing, while it makes for somewhat discouraging reading, is counterbalanced by about an equal number of factors on the upside for Mexico, including the following.  

(1) The middle class in Mexico has grown prodigiously under the benefits of NAFTA. At the same time, there is a low-labour-cost base that provides a strong incentive for foreign firms to locate some of their operations in the country. Mexico also has a free trade agreement with the European Union and operates maquiladoras, which import materials and equipment duty-free and tariff-free for re-export of final product.

(2) Mexico offers lower costs of transportation for U.S. and Canadian producers versus China. A big part of this is the time factor. Shipping by rail and truck throughout North America is a lot faster than the cross-Pacific voyage from Shanghai or Hong Kong. This becomes especially important when an order has to be changed or altered for any reason.

(3) Mexico, in the north, borders on the two largest U.S. states by population, California to the west and Texas to the east. It is likely that the next census results will move Houston, Texas into third place among the most populous cities in the U.S., past Chicago.

(4) The nation has several world-scale companies. Mexico’s status as an emerging nation is being recognized by international bodies. It was invited as a guest attendee to the recent G8 meeting in L’Aquila, Italy. It has established a competitive democracy and capitalist economy which have provided relative stability in terms of inflation and employment.

(5) There is huge potential for investment in a number of key areas. These include housing, telecommunications and the energy sector. It only needs to be unleashed.

Mexico is currently going through a particular rough patch. Consensus forecasts for 2010 offer hope, however, with Mexico’s GDP growth expected to be about the same as for the U.S. and Canada, in a range of +2.0% to +2.5%. The general freeing up of credit and private-sector foreign investment, along with increased raw material and finished product demand that will come with global recovery, will awaken Mexico from its siesta.