The Economist reports that Mexican business leaders envy Brazil. Mexicrats must have been miffed when Goldman Sachs anointed the ‘BRIC’ without including a ‘M’. At the time (2001) there was reason to protest. In the previous half decade Mexico’s GDP growth more than doubled Brazil’s: 4.5% versus 1.9%. Mexico had just joined Chile as the only Latin American nations with an investment-grade credit rating. Furthermore, each nation had a tumultuous past, riddled with debt and currency crises, Brazil more recently than Mexico. And Mexico seemed locked-in to stable growth thanks to preferential trade ties with the US via NAFTA.
Fast forward to 2009. Brazil is the first Latin American nation to exit recession. Mexico is still under water, and likely won’t gasp its first breath of recession-free air until mid-2010. Strangely, according to key indicators, not so much changed between 2001 and the “Great Recession.” GDP growth between 2002 and 2007 was about the same for Brazil and Mexico. Each nation enjoyed low inflation, both nurtured formidable MNCs, and both continue to struggle with corruption and drug-related violence on a grand scale.
What’s going on? Currency provides great insight into the shifting fate of each nation.
Currency strength reflects current macroeconomic health and outlook. The Brazilian real now sits near pre-recession levels, about 1.75 reais to the dollar. Despite a recent rally the Mexican peso is far from recovering its pre-recession valuation, down over 20% vis-à-vis the dollar.
Beneath the data sets of recent years, Brazil’s economy has been driven by demand for its commodities from China, India, and elsewhere. Additionally, Brazil has distinguished itself in emerging niche markets, such as aircraft production and biofuels. Dynamic trade buoys the real. Meanwhile, Mexico has kept to traditional strengths: oil, tourism, and manufactures for the American market. Oil is down 50% since last year, tourism has dropped off a cliff, and cheaper Chinese goods fill Wal-Mart, pushing out Mexican trinkets. Reliant upon consumption in America and lacking innovation, Mexico just doesn’t offer the prospects of Brazil.
