Brazil & Mexico,
a Bipolar Outlook

Brazil and Mexico, Latin America’s largest economies, tend to polarize investors’ perception about the region. Economic growth has alternated between the two countries in the past decades. After a period of prosperity in Brazil, the pendulum now seems to swing towards Mexico.
The Brazilian American Chamber of Commerce and the U.S.-Mexico Chamber of Commerce brought together a panel of economists to discuss commonalities and distinctions between the two regional powerhouses. Thomsom Reuters co-sponsored the event.
Speakers included Nomura’s Latin American strategist Benito Berber, NWI Management’s Hari Hariharan, Mauro Leos, Moody’s Credit Officer for Latin America, and Tony Volpon, Nomura’s head of Emerging Markets Research. Tandem Global Partners’ Paulo Vieira da Cunha moderated the panel.
Geographically and culturally, Brazil and Mexico couldn’t stand farther apart, a condition that may date as far back as their past as colonies of Portugal and Spain, which also determined the fundamental distinction between the two countries: their different languages, Portuguese and Spanish.
But even long before the influence of Portugal and Spain over them had faded, both nations remained identified with each other. If at first, such coincidence of fates and development was similar to that of countries discovered, harvested for their natural riches, and dominated for three centuries by Europeans, now it’s mainly through the sheer power of their economies.

‘The long run has arrived’ for Brazil is how Volpon characterizes the Latin American giant’s current momentum. Favorable conditions present in the early 2000s – a boom in global commodity prices, increased foreign reserves, and an overall improvement of its risk profile – have all contributed to the country’s growth in the period.
It was a time of unmatched political and economic stability, with higher consumer credit fueling increased domestic demand by a re-energized middle class. New markets to its exports, such as China’s, also helped compensate for the slowdown of the U.S. economy, then Brazil’s main trade partner.
Revitalized capital markets also attracted badly needed investments to the country’s technology and infrastructure industries. Credit should also be given to the central bank, whose policies were instrumental helping Brazil navigate through the collapse of the world’s financial markets of 2007.
But alas, it was not to last forever. While President Luiz Inacio Lula da Silva‘s two terms in office saw an unprecedented spike in growth of Brazil’s work force, so did labor costs. Along with an outdated tax code, and as commodity prices reached a plateau, the Brazilian economy is now expected to go back to levels of growth of the early 2000s, if not lower.
For Leos, the consequence of years of necessary intervention by the central bank on the country’s financial markets, to ward off an artificial boost of its currency driven by speculation and over investments, may lead to an ‘hyper active government.’ That may translate as uncertainty to investors.

A radically opposite picture can be drawn about Mexico’s momentum, mainly centered in the election of its new president, Enrique Peña Nieto. Fresh investments are beginning to pour into the country economy, perhaps due to the return to power of the president’s party, the PRI, which had dominated Mexican politics for over half a century.
Even without conveying a radical message, a fact underlined by his lack of commitment to changing the conversation about the bloody and costly war on drugs going on in Mexico, Peña Nieto is naturally riding the wave of a new hope for the country. And so far, his most visible reform proposals have stricken a positive chord in the markets.
Among factors that may work to his advantage, are the signs of economic recovery of Mexico’s main commercial partner, the U.S., and a new take on the issue of immigration, a matter that directly affects a large segment of its work force. By the way, labor costs and wages are much lower in Mexico than Brazil.
Berber touched on what’s likely to be the biggest expectations about Peña Nieto’s tenure in office: his commitment to a market-based economy, which is all that investors wanted to hear, and the creation of a social security system, which may prove way more challenging even to the PRI’s formidable structure and powerful reach.
The new president’s also alluded to the possibility of open up the country’s oil industry, but made sure he has no intention to allow the privatization of state-run Pemex SA. He may wind up favoring a similar arrangement that Brazil’s own state-run Petrobras SA has, with part of its capital open to investors.

So, if both Brazil and Mexico, for all their regional might and combined wealth many times that of the countries that colonized them, lack ‘stature at the international scenario,’ as Hariharan’s put it, in the past decades they’ve both become crucial players in the world economy.
The biggest factor in such a rise in relevance may be their opening towards Asian markets, specially of China, which both countries conducted as an alternative to, and independent from, the U.S. and the European Union nations they used to primarily trade in the past. Such opening, which many so far see mostly to China’s advantage, may prove very productive indeed to Latin America, going forward.
As some Asian economies continue to struggle to regain a path for growth, as it’s been happening for so long in Japan, or for trade diversification, which southeast Asian countries lack, and let’s not even consider what goes on in the Middle East, it’s left to Latin America to offer the much needed alternatives for a global economic growth.
As it’s obvious that Africa is far from ready to prime time, it may be still up to Brazil and Mexico to save the day for a hungry world population that will continue to explode, as it seems inevitable. That, despite the fact that Brazil is in a slowdown pattern of growth expected to last for a couple of years, and that Mexico has some serious social and infrastructural woes to overcome.
Leos seems to have an appropriate metaphor to explain how these two countries are to be perceived by investors. As ‘markets are manic depressive,’ he says, (Mexico playing the role of the ‘manic,’ in this illustration, and Brazil, the ‘depressive’), it’s important not to expect too much slowdown from Brazil, or hyper-activity from Mexico.
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