In the years since coming close to financial collapse in 1994-95, the country has become more tightly integrated with its NAFTA partners – the US and Canada – and has gained a reputation for credible macroeconomic policy management. However, tighter integration with the US and Canada is a mixed blessing. Since Mexico’s business cycle now moves in lock step with the US, the country experienced a large growth shock in 2008-09. On the flipside, recovery in the US from its worst recession since the 1930s has helped the Mexican economy to bounce back. However, despite the cyclical recovery, Mexico’s economy faces longer term structural challenges that could crimp growth potential: a political structure resistant to reform and tenacious organised crime groups unafraid to use violence.

Mexico is richer, more creditworthy and more congenial for business than the regional average. However, its growth performance has lagged.

Exporters and investors face three main risks in Mexico: high business cycle and currency risks as well as a high degree of difficulty enforcing contracts.

• Mexico’s close integration with the US heavily impacted the economy in 2008-09, when the collapse in US industrial production quickly transmitted itself to Mexico.  But things have turned around in the last couple of years thanks to a reviving, albeit still weak, US economy.  Mexico’s low relative unit labour costs and the relatively good performance of the US manufacturing sector has helped to drive a strong recovery in Mexico’s US market share.  The recovery was also helped by stronger domestic demand, which has been supported by sustained growth in employment and corporate and consumer lending.
• However, despite the economy’s cyclical recovery, longer-term challenges loom, notably the need to address structural problems in labour and product markets, fiscal policy and the petroleum sector. 
• The petroleum sector is a particular challenge as the constitution effectively rules out private sector involvement, even through production sharing or service agreements.  However, the sector could be opened up to private sector involvement if the country’s new president, Enrique Nieto, can push through constitutional changes.  Such changes are likely to be controversial, but could help Pemex, the state-owned oil producer, boost output and tap technically challenging deepwater reserves.

The economy’s growth rebound from the slump in 2009 does not yet appear to have run into capacity constraints - a wide range of indicators, including inflation, suggest that demand pressures are muted.

Mexico has received substantial foreign direct investment inflows, particularly in manufacturing and financial services. The current account remains in structural deficit, but the recovery in manufactured exports to the US and higher oil revenues have helped to prevent it from blowing out.

• The newly inaugurated president from the formerly dominant Institutional Revolutionary Party (PRI), Pena Nieto, recently signed a pact with the country’s leading political parties to achieve major changes, including education reforms, promoting more competition in the telecommunications sector and boosting the country’s infrastructure. The 'Pact of Mexico' signals a degree of cooperation between PRI, outgoing President Felipe Calderon's National Action Party (PAN) and the leftist Party of the Democratic Revolution (PRD). However, Nieto will need to be a deft negotiator if he is to deliver on his promised structural and governance reforms and curtail drug cartel violence.  In particular, he will need to negotiate with still-powerful opposition parties as well as heavyweight PRI parliamentarians and state governors - who have become better resourced and more autonomous over the last few years.

Despite Mexico’s political complexities it manages to rank in the second top quartile on ‘government effectiveness’ in the governance indicators produced by the World Bank and outrank the Latin American regional average. However, Mexico ranks in the bottom quartile on ‘political stability’.

• Mexico historically has had a reputation as a difficult place to do business. However, the reality today is much more nuanced. It’s true that the business environment is politicised, dominated by large conglomerates and lacks a strong legal framework. But this is changing rapidly as the government and private sector are gradually becoming more outward looking – while selective, the government is increasingly drawing on international frameworks and the private sector is stepping up its cross-border activities. At the same time, the economy welcomes foreign involvement (outside the petroleum sector) and access to international arbitration is guaranteed by law and by free trade agreements such as NAFTA.
• The complexity of the business and investment environment is reflected in the variation in Mexico’s rankings on the World Bank’s governance indicators and ease of doing business gauge (Chart 6).

Mexico’s percentile rankings on ‘ease of doing business’ and ‘protecting investors’ are in the top tier of countries and compare favourably with the OECD average. But on factors that matter most to foreign investors, such as controlling corruption and rule of law, Mexico’s rankings are less congenial – it ranks in the second bottom quartile for control of corruption and rule of law.

• Mexico is  an ‘upper middle income’ country with a per capita GDP of US$10,100. But this high level obscures large regional disparities, with the sizeable urbanised and manufacturing areas in the country’s north and around Mexico City out earning their more rural and southern counterparts by a wide margin.
• Mexico is a major recipient of remittances, sent mainly from the US. They amounted to roughly US$22.8 billion (2% of GDP) in 2011.

Mexico is an upper middle income country with a per capita income of US$10,100. However, income inequality is high.

Violent crime – primarily related to narcotics and the activities of organised criminal gangs – is a widely reported problem.

*All 2010 figures unless specified

**The HDI is composite measure of human development: long & healthy life (life expectancy), education (literacy & education enrolment) and income (GDP per capita)

***Expressed as % of GDP unless specified