Recent reforms will help Mexican economy

The Mexican economy, as measured by the inflation-adjusted gross domestic product data, will expand 2.5 percent in 2016.

This follows similar gains of 2.5 percent in 2015 and 2.3 percent in 2014. Our forecast for a steady pace of growth in the coming year is based on expectations that a decline in domestic economic activity resulting from the recent drop in oil prices will be mitigated by an increase in demand for Mexican exports from the U.S.

Regrettably, Mexico is not yet able to benefit fully from the strengthening U.S. economic recovery. The Mexican industrial sector is still struggling from a need for infrastructure upgrades and other types of structural reforms necessary to support a more rapid expansion of its industrial capacity. Under current conditions, an annual growth rate of 2.5 percent in its GDP is about all that can be expected in terms of long-term economic growth. And this pace of growth is not fast enough to raise the standard of living for most Mexicans. Recent fiscal reforms will help to attract the necessary investment, but it will take a few years for this process to produce more rapid growth in industrial capacity.

The economic reforms that have already been implemented have been widely-hailed by analysts and large investors in the U.S. At this time last year there was a spate of articles in the U.S. business press about the opportunities for investment in Mexico. So far this year, the investors' worries about the problems with China's economy have triggered a global flight to safe assets. The result of this rush to safer investments is that, as of this moment, the opportunities in Mexico are getting less attention than they were a year ago. Or even worse, the expectations for the Mexican economy in the short-term are being lumped in with the Chinese problems.

Another factor that has distracted investors' attention away from the opportunities in Mexico is the drop in oil prices. Falling oil prices have generated a large amount of uncertainty for investors all over the world during the past year, and the fact that the Mexican government relies heavily on oil revenues has only increased this level of uncertainty. This trend is best demonstrated with a chart of the value of the peso vs. the dollar.

But market volatility in the oil and currency markets is cyclical. This period of volatility will eventually be followed by a period of stability. As soon as stability returns to the oil market, the cheap peso will attract the attention of investors eager for a stronger return than they are able to realize in many of the other global regions in which they can invest.

But all of the investor uncertainty notwithstanding, there should be little doubt that the economic conditions in Mexico are stronger than what is reflected in the current value of the peso. In other words, the peso is a huge bargain at these levels. The Mexican currency has been pulled down by the weakness of some of the other economies in Latin America, but astute investors will soon start to fine-tune their forecasts about the opportunities and risks in Latin American countries.

Investment in new manufacturing capacity requires a long-term perspective and discipline, and these processes can be temporarily disrupted by short-term events. Nevertheless, if the Mexican economy represented a good opportunity a year ago, then it is even better now. The Mexican economy is growing at a consistent rate, and with the recent decline in the value of the peso, the opportunities in Mexico are now significantly cheaper.

This belief is shared by the machinery manufacturers that supply the plastics industry. Every quarter, the Society of the Plastics Industry Inc. conducts a survey of its members in the Committee for Equipment Statistics (CES). The CES represents more than 100 of the world's best-known and most technologically-advanced manufacturers of plastics machinery. This survey is an effort to measure and forecast the changes in market demand and investment levels for plastics equipment and machinery. The survey includes questions about the outlook for demand of plastics machinery in the coming months in each of five global regions.

Over the past three years, the countries that have consistently had the highest expectations for near-term market growth for plastics machinery are the U.S. and Mexico. This does not mean that the actual levels of investment for capital equipment have been the same in these two countries during this time.

The U.S. is still a much larger market in terms of overall size. But it does mean that the rate of growth in capital spending for plastics machinery has been strong in both countries during the past couple of years. Ten years ago it was Asia and Latin America that had the strongest growth rates in capital spending — more recently, it is Mexico and the U.S.

This should be welcome news to all Mexicans who want to reap the benefits of an expanding economy and a rising standard of living. The biggest impediment to faster growth in the Mexican economy is a lack of industrial capacity and the infrastructure necessary to support this capacity. The only solution to this problem is increased investment in factories and infrastructure. There is much more work to be done in the area of economic and political reforms, and the recent downturn in the price of oil has been a setback. But if Mexican political leaders stay disciplined, then the long-term outlook for Mexico should be one of steady improvement.