Low Oil Price: A Good Chance for A Diversified Economy in Mexico

Mexican President Enrique Peña Nieto addresses the audience during his second State of the Union address at the National Palace in Mexico City, Sept. 2, 2014. PHOTO: REUTERS/HENRY ROMERO

Usually, people would not like a change unless they are having a trouble. That’s why some are smarter than the rest because they foresee the trouble and make the right move before the trouble comes. The falling oil price in last year, again, hurts economies which rely on oil exports. Countries, such as Venezuela, Saudi Arabia, Russia, suffered a lot because of the lowering oil. However, there is an exception, which is Mexico, who foresaw and seized this opportunity to develop into a more diversified and healthier economy.

This is mainly because of the deceasing Mexico’s dependence on oil. According to a recent data expressed by Mexico Finance Ministry. Mexico’s government revenue from oil decreased from 31% to 20% from 2014 to 2015. Yes, you might think this declined dependence might be the cause of falling oil price. But in fact, the difference between non-oil sector and oil sector is $9.6 billion, which is 4% of total revenue in 2015. This means that under the situation of low oil price, Mexico is trying to become a more diversified economy to offset the negative effects brought by low oil price and keep growing.

Screen Shot 2016-04-03 at 16.08.20Mexican President Enrique Peña Nieto, since his presidency in 2012, has already launched series of sweeping reforms in industries like telecommunication, energy, education to stimulate economy and eliminate corruption, weakening its dependence on the price of crude oil. Especially in the tax rate, Mexico raised the income tax to 35%.

As Credit Suisse Group AG’s chief economist, Alonso Cervera said, “They certainly got some relief on the revenue front from having the fiscal reform in place.”

Non-oil sector revenue increased by 27% in 2015. A steady GDP growth rate of around 2% makes people feel the low oil price didn’t influence this oil-dependent country at all. Rising government revenue help government to put more investments in other sectors such as Automobiles, which has become another pillar industry of Mexico’s economy.

Since 2010, Automakers have announced $24.2 billion worth of investment, nearly a third of all new spending on North American factories. There are several reasons for Automakers to do so. First reason is because of the cheap labor. Mexican auto labor’s compensation is only 20% of that in USA. Meanwhile, it is said that Mexican workers can build cars, quality of which exceeds that of their best plants in the world.  What’s more, Mexico has free trade agreements(FTA) with more than 40 countries, making Mexico more favorable to any other place in the world for a much lower cost.

Meanwhile, to be insulated from oil price risk, Mexico signed several contracts in previous year to secure the oil price of $49 per barrel for its oil exports, which enable the government lock in a higher price and to be more flexible in design policies.
When we take a look at Mexico’s export, it also shows a good sign. The average of export price kept going down from 130 to 95 since 2014, while the total export, on the contrary, is quite steady around a certain level. This means that Mexico has successfully transferred its economic focus from oil to a more diversified economy to smooth the whole economy growth.

Screen Shot 2016-04-03 at 16.53.54Screen Shot 2016-04-03 at 16.55.11

Just as I said in the beginning, smart people change before the real trouble comes. Mexico has managed itself well in the situation of falling oil price to a more diversified economy, becoming the 5th largest economy in the world. For other oil-dependent countries such as Russia, Venezuela, etc., however, it is never too late to make the right move. A falling oil price is an opportunity for these oil-dependent countries to make some changes and develop into a healthier economy. Because if they keep relying on a single commodity export, their economy will definitely worsen in the near future.

 

Reference:

http://www.ibtimes.com/mexicos-economy-president-pena-nieto-promised-sweeping-reforms-corruption-accusations-2078415

http://www.bloomberg.com/news/articles/2016-02-24/why-lower-oil-prices-don-t-hurt-mexico-as-much-as-they-used-to

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One Response to Low Oil Price: A Good Chance for A Diversified Economy in Mexico

  1. Interesting point of view! As oil price has been falling apart, we all stress a lot of concerns over OPEC countries or Russia, and tend to neglect one of the large oil exporters – Mexico. Surprisingly, Mexico has been doing well in exports transforming. If my resource is reliable, the exports of oil used to take up 11% of the total value exported in 2013. Two years later, however, oil fell to No.4 on the list of goods exported, at $22.8 billion, accounting for only 6% of the total exports. The top three was respectively vehicles (23.7%), electronic equipment (21.3%) and machinery (15.5%). According to these statistics, Mexico is a great example of country developing new sectors and taking advantage of resources that it has comparative advantage in. The great demand for oil from the US and other south America countries guaranteed Mexico a relatively stable exports during transforming. In this case, Mexico took advantage of its comparatively low manufacturing cost in surrounding area, and largely increased the production and exports of labor-intensive goods. Another fact I find interesting is that theoretically we believe countries should specialize in certain area that it has the most comparative advantage in. But in reality, it turns out that countries should well diversify their exporting portfolio instead of just specializing in one or two single industries, just as Mexico did.

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