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Can Mexico's Potential Finally Be Realized?

This is a guest commentary for CNBC.com.

When talking about Mexico it’s quite common to refer to its great economic potential. However, such potential has not yet materialized. Growth during the past eight years has been disappointing, averaging about 2.2% — barely half the rate for Latin America and the Caribbean.

Leo Schlesinger

This growth is sustained in large part by industrial exports, nearly 80 percent of which are bound for the United States, mainly in the form of auto and electronic parts, crude oil production, tourism and remittances.

Understanding that some of the greatest risks to the Mexican economy were foreign and related to the macroeconomic environment, the main focus of the Partido Accion Nacional (the party in government for the past 12 years) has been to achieve stability — even at the expense of growth. Through the measures taken, Mexico has successfully controlled inflation, maintained adequate levels of debt and has amassed all time record currency reserves of around $160 billion.

This provides the country with an arsenal of weapons to combat an eventual crisis, such as the ability to lower interest rates and the liquidity to inject to the economy if needed.

Through conservative policies, Mexico has not experienced the issues that plagued the financial sector in developed economies, has promoted a solid banking industry that remains significantly underserved in terms of credit and financial services, has no significant risk exposures, and has plenty of room to grow.

Mexico is not only in good shape to deal with a global downturn, but finally its growth prospects look bright.

"In the next decade Mexico is likely to become Latam's largest economy and one of the most dynamic among emerging markets," Nomura Securities analyst Benito Berber wrote in a recent report.

Both in terms of exports and internal consumption, Mexico has significant upsides. Its industrial production has become more competitive as the currency has devalued, China's labor and logistics costs have increased, and U.S. consumption has started to recover.

However positive its prospects, Mexico’s real potential lies not with exports, but with an internal market that is virtually an untapped engine of growth. Mexico enjoys a demographic bonus with a population of 117 million people that’s relatively young.

Even though half of the country is poor, Mexico has the opportunity to advance policies to develop a middle class and integrate the excluded to the formal economy as new consumers and taxpayers.

This internal market has accumulated a significant pent-up demand. Just the housing market alone has built up a deficit of over 10 million units (based on my estimates and data from Infonavit – Mexico’s largest mortgage lender). If developed, these units may provide, shelter, assets and collateral to more than 30 million Mexicans and potentially trigger a consumer credit boom.

The icing on the cake for Mexico may come from the upcoming PRI (Institutional Revolutionary Party) administration that has campaigned on the back of long-due structural reforms that seek to enhance competitiveness and drive economic growth. Energy, labor and tax reforms that will soon be introduced to Mexico’s congress are considered highly effective in providing an additional boost to the economy.

Short of a major political upset, these reforms should pass in the next few years and, if so, will be credited with a potential additional growth injection of over two to three percentage points to reach annual GDP growth rates of over 6.5 percent. The risk of a fresh economic slump in the United States makes the need for reforms even more pressing. But even if reforms do not take place, according to the Bank of Mexico, the growth expectations for the country remain positive — in the range of 3.5 to 4 percent per year.

Although the future looks bright for Mexico, the road to development is paved with risks and issues that if not addressed may derail the economy. Just to name a few, the country faces challenges that include levels of poverty and inequality which limit consumption and feed insecurity as well as push young people into the arms of organized crime.

Mexico's economy is still dominated by monopolies in key industries, we continue to experience high levels of corruption, and the educational system is highly deficient. In order for Mexico's growth to be truly sustainable in the long term, the country will have to address these and other social issues.

All things considered, when predicting Mexico's future, the balance remains positive; the country has developed the tools, the market and is on the verge of implementing the reforms that support growth, development and investment. We should expect the conversation to shift from potential to results.

Leo Schlesinger is the CEO of MASISA México, an integrated forestry, chemicals, composite boards and retail leader. He has an MBA from London Business School.

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