Waiting game: Mexico depends more than ever on the U.S. economy. That's both good news and bad.

Author:Rueda, Marisol
Position:Mexico Outlook

In January of last year the North American Free Trade Agreement (NAFTA) turned 10. Over the past decade the close relationship between the economies of Mexico and the United States grew even closer. Even though Mexico now has trade deals with 42 countries, nearly 90% of its exports go due north to U.S. consumers. The year ahead will be no exception; the Mexican economy is expected to grow at the same pace as its main economic partner.

Mexicans will begin the year facing two major trends, analysts say. "The good news is that there will be a certain economic stability, but the bad will be that the country will be standing still watching others race ahead," says Jonathan Heath, chief economist at Banco HSBC Mexico. Heath thinks the Mexican economy will increase by 3.8% in 2005, down from 4% growth this year.

Growth will track economic improvement in the United States and will be bolstered by high international prices for oil, of which Mexico is a major exporter.

The LATIN TRADE Consensus Forecast of investment banks is in line with Heath's view. It predicts 3.6% growth in 2005, down from 4.1% this year. "We have always had a relation with the economic cycle of the U.S. economy, but that has gotten stronger in recent years, so we're at the crossroads situation of seeing whether we grow or don't grow based on the strength of the United States," Heath says.

The world's 10th-largest economy could substantially reduce its economic dependence on the United States, thereby achieving more sustained growth and keeping up with its competitors in the race toward development, but big obstacles stand in the way: lack of structural reforms in the energy sector, on labor issues and on tax collection. "In order for the government to have resources, there has to be a profound government reform. On the other hand, if the private sector invests in energy, lots of resources could be channeled to infrastructure, but for that to happen there has to be energy reform," Heath says.

Getting reforms under way, one of the campaign promises of President Vicente Fox, will be hard to accomplish in the remainder of his administration, which ends in December 2006. The former Coca-Cola executive faces a Congress where his National Action Party doesn't hold a majority and has not managed to achieve the necessary consensus.

Holding back on reforms doesn't create just a competitiveness problem but also generates a climate of frustration, Heath says. "They know exactly the way to achieve all of these reforms, but they haven't found a way to do it," he says. In August, Mexico closed...

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