Mexico, the un-Brazil

Author’s Note: Ruchir Sharma, head of emerging markets at Morgan Stanley, recently penned a piece in TIME asserting that Brazil is “the un-China.” That comparison inspired this post. Mexico Today, a public-private enterprise of which I am a paid contributor, provided some data.

Mexico’s technocrats have been seething at comparisons with Brazil for years. Who could blame them? From 2004-2009 Brazil’s growth rate doubled that of Mexico’s, just one of many indicators (foreign direct investment, exports, poverty reduction) that spelled Mexico’s—long self-anointed as Latin America’s vocero—comeuppance. Now a clutch of indicators suggests Brazil’s economy is overheating, and Mexico stands to benefit from the contrast. Perhaps Mexico should lay claim to being the un-Brazil.

1. Inflation:
Mexico has 3.3 percent inflation, as of June 2011, giving the central bank freedom to set interest rates as necessary without fear of unleashing high inflation, or luring a glut of portfolio investment into the country. Brazil is in a tighter spot: Brazil’s inflation in 2011 is 6.3 percent.
This is a problem for two reasons. One, it touches the two percent band Brazil’s central bank uses to control inflation, so breaching this band compels the bank to design a response. And two: the fix breeds another problem, because when Brazil’s central bank increases interest rates to stymie inflation it draws in hot money. Hence, the Brazilian real is among the world’s “most overvalued” currencies, according to Goldman Sachs. As Rachir Sharma points out, when a middle-income country has such a strong currency it is “a symptom of a seriously imbalanced economy.”

2. Infrastructure:
Spending on infrastructure will prove a lasting legacy of the Calderón presidency. Despite a serious recession, sustained drug violence, and other distractions like the outbreak of H1N1, Calderón has increased infrastructure spending to 5 percent of GDP.
Infrastructure spending in Brazil has consistently declined over the past four decades; it now stands at about 2 percent of GDP. Morgan Stanley asserts that figure must double if Brazil is to enjoy economic growth of 5 percent in the years ahead.

3. Exports:
Mexico is the largest exporter in Latin America, $27.9 billion in April. As of June, Brazil’s exports were $23.7 billion. Of course, the devil is in the details for both nations. Brazil’s exports skew toward a few commodity exports to China: soybeans, iron ore, and grain. In fact, when you look at exports to China, Brazil’s largest trading partner since 2009, you see a $5.4 billion trade surplus. When you strip away soy products and iron ore, Brazil runs a trade deficit with China. God forbid a collapse in commodity prices.
Meanwhile, Mexico is technically among the most free-trading countries in the world, with some 22 free trade agreements in effect. But everyone knows which one really counts. So Brazil is too reliant on just a few products; Mexico is too reliant on NAFTA.

4. Debt:
Mexico reduced debt to GDP in the past twenty years. As of 2009, debt stood at 22 percent of GDP. As of January 2011, Brazil’s public debt is 40 percent of GDP.
Debt is manageable in both countries, Brazil has less room to maneuver because it is nearer the golden threshold of sustainable debt load—60% of debt to GDP—for a developing country and its current growth is propped up by commodity exports, which could rapidly lose value.

None of this adds up to Mexico becoming the high-growth story of the decade. Rather, Brazil’s economy increasingly involves growth with little margin for slowdown or macroeconomic surprises. Mexico’s economy can grow more easily.