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Mexico Economy

ECONOMY

Mexico is highly dependent on exports to the U.S., which represent more than a quarter of the country's GDP. The result is that the Mexican economy is strongly linked to the U.S. business cycle, and has suffered from the economic slowdown in the United States. Real GDP grew by 5.1% in 2006, 3.3% in 2007, and 1.3% in 2008. Government officials expect the economy to contract by 6.8% for 2009 and rebound in 2010 with 3% growth.

Mexico's trade regime is among the most open in the world, with free trade agreements with the U.S., Canada, the EU, and many other countries (44 total). Since the 1994 devaluation of the peso, successive Mexican governments have improved the country's macroeconomic fundamentals. Inflation and public sector deficits are under control, while the current account balance and public debt profile have improved. As of December 2009, Standard & Poor’s and Fitch downgraded Mexico’s sovereign debt rating one notch, citing fiscal concerns. Nevertheless, Mexico’s sovereign debt remains investment-grade, with a stable outlook.

Trade
The United States was the destination for about 80% of Mexico’s exports in 2008. Top Mexican exports to the U.S. include petroleum, cars, and electronic equipment. There is considerable intra-company trade. Top U.S. exports to Mexico include electronic equipment, motor vehicle parts, and chemicals. Mexico is the second-largest export market for the United States.

Mexico is an active and constructive member of the World Trade Organization (WTO), the G-20, and the Organization for Economic Cooperation and Development (OECD). It hosted the September 2003 WTO Ministerial Meeting in Cancun. The Mexican Government and many businesses support a Free Trade Area of the Americas.

Concerns about trade measures and practices between the United States and Mexico are generally settled through direct negotiations between the two countries or addressed via WTO or North American Free Trade Agreement (NAFTA) formal dispute settlement procedures. The most significant areas of friction involve agricultural products such as livestock and sweeteners as well as cross-border trucking. To address the issues that affect these industries in a manner consistent with the principles of free trade, the United States and Mexico have established technical working groups.

Agriculture
Only 11% of Mexico's land area is arable, of which less than 3% is irrigated. Top revenue-producing crops include corn, tomatoes, sugar cane, dry beans, and avocados. Mexico also generates significant revenue from the production of beef, poultry, pork, and dairy products. In total, agriculture accounted for 3% of GDP in 2008, yet agricultural employment accounted for over 15% of total employment. Most of the population is employed in the services sector (60% of total employment).

Implementation of NAFTA has opened Mexico's agricultural sector to the forces of globalization and competition, and some farmers have greatly benefited from greater market access. In particular, fruit and vegetable exports from Mexico have increased dramatically in recent years, exceeding $4.7 billion to the United States alone in 2009. However, structural inefficiencies that have existed for decades continue to limit improvements in productivity and living standards for many in the agricultural sector. These inefficiencies include a prevalence of small-scale producers, a lack of infrastructure, inadequate supplies of credit, a communal land structure for many producers, and a large subsistence rural population that is not part of the formal economy. It is estimated that half of Mexico's producers are subsistence farmers and over 60% produce corn or beans, with the majority of these farmers cultivating five hectares or less, although the number of Mexican farmers is steadily decreasing as they seek greater economic opportunities from off-farm employment.

Mexico subsidizes agricultural production through various support programs, the most notable being the PROCAMPO initiative. The producer support estimate for Mexico is 13% of gross receipts, compared to 10% for the United States.

Manufacturing and Foreign Investment
The manufacturing sector, which accounts for about 18% of GDP, dropped by 0.4% in real terms in 2008. Construction dropped by 0.6% in real terms in 2008.

Foreign direct investment (FDI) in Mexico for 2008 was $ 22.5 billion, down 18.5% from the previous year. The U.S. was once again the largest foreign investor in Mexico, accounting for 40% ($9.1 billion FDI from the U.S.) of reported FDI. The economic slowdown in the U.S. in 2008 and 2009 has caused a significant decline in this figure. The Mexican Government estimate of FDI for 2009 is $12 billion to $13 billion.

Oil and Gas
In 2008, Mexico was the world's seventh-largest crude exporter, and the third-largest supplier of oil to the U.S. Oil and gas revenues provided more than one-third of all Mexican Government revenues.

Mexico's state-owned oil company, Pemex, holds a constitutionally established monopoly for the exploration, production, transportation, and marketing of the nation's oil. With its primary known oil reserves already in serious decline, Mexico still must determine in the near future how it wants to exploit probable deep water reserves in order to avoid very difficult economic choices. The Mexican Congress passed energy reform legislation in October 2008 that gives Pemex more budgetary autonomy and transparency. However, the reforms do not open the petroleum sector to private sector investment. Mexico also imports finished petroleum products such as gasoline, due to a lack of refinery capacity. In 2009, the government decided to build a new refinery, the first in 30 years, in the state of Hidalgo.

While private investment in natural gas transportation, distribution, and storage is permitted, Pemex remains in sole control of natural gas exploration and production. Despite substantial reserves, Mexico is a net natural gas importer.

Transportation and Communications
Mexico's land transportation network is one of the most extensive in Latin America with 357,000 kilometers (221,739 mi.) of paved roads, including more than 11,000 kilometers of four-lane paved roads. The 26,622 kilometers (16,268 mi.) of government-owned railroads in Mexico have been privatized through the sale of 50-year operating concessions.

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