During January 2013, Mexico’s trade balance turned negative as exports fell while imports increased. The trade balance of a country is important since it has profound impacts on currency exchange rates, and hence on inflation. The effect is much larger for economies in which trade (e.g. imports and exports) accounts for a large percentage of their gross domestic product (GDP).
In Mexico’s case, the trade balance (i.e. exports minus imports) is usually close to neutral, so the effects on the currency are not as severe as in less mature economies with heavy trade dependence. Mexico, though, is an export oriented economy, with exports accounting for almost a third of GDP. As such, looking at the components of the trade balance gives an insight into the strength of the economy.
The graph above shows that seasonally adjusted exports decreased by almost 5% in January versus December 2012 (1% versus January 2012) while imports increased 4% versus December 2012 (~7% vs. January 2012). The graph shows an apparent strong decrease, but a $2 billion trade gap will not meaningfully affect Mexico’s GDP of over $1 trillion.
Exports to the U.S. increased 2.2% versus a drop of 6.8% to the rest of the world; of note, U.S. exports account for approximately 75% of all exports. Mexico is heavily linked to the U.S. and therefore the increase in U.S. exports far outweighs the global weakness, which should secede once global recovery picks up. The downside, though, is that non-oil exports decreased 8% while oil exports increased almost 16%. Oil is currently at an elevated price, which have inflated total values. Additionally, autos and auto supplies (Mexico’s main exports) are highly dependent on the recovery of the auto sector in the U.S.
The upside is that the increase in imports was driven by an increase of almost 12% in consumer products, compared to increases of 3% and 2% in intermediate and capital capital goods, respectively. This reflects a strong consumer demand that is vital for economic recovery in Mexico. If the consumer sector were to weaken, Mexico’s recovery would be delayed, but as long as it remains strong, recovery may come sooner than expected.
Investors in Mexican ETFs (e.g. EWW, NAFTRAC) or closed end funds (e.g. MXF) should read the data as a positive data point for the medium term recovery of the Mexican economy. Nonetheless, Mexico remains joint at the hip to the U.S. and therefore its full recovery depends on its northern neighbor. Other Latam ETFs (e.g. ILF, GML) should also expect a medium term recovery within the region, though Mexico’s ~25% contribution may be more than offset by Brazil’s 50% contribution if Brazilian macroeconomic indicators continue signaling adverse conditions.
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