Mexico has long had a privileged position in Latin America. Its proximity to the United States — the largest consumer economy in the world — has contributed to the growth of a robust domestic manufacturing industry, which has become the bedrock of the Mexican economy. Manufacturing has made Mexico the third-largest U.S. trading partner and has propelled its economy to the rank of second-largest in Latin America. Still, as in all oil-producing countries, the drop in global oil prices will hurt the country's financial position, possibly jeopardizing its security reforms. But overall, the country will manage the price drop relatively well.
Despite low growth compared with previous years, Mexico will continue to make economic progress and will lead in regional manufacturing for the foreseeable future, largely because of its close economic ties to the United States. Nearly 80 percent of Mexican exports are destined for U.S. markets, and almost half of these exports are higher-value products, such as vehicles and electronic goods. Manufacturing growth is sustained by rising natural gas flows from the United States, which have propelled the rapid expansion of Mexico's electric grid by making energy availability more reliable.
Unsurprisingly, the commercial linkages created between the two countries over the decades, particularly since the passage of the North American Free Trade Agreement in 1994, have also accelerated capital flows into the country. Mexico received about $28.5 billion in foreign direct investment in 2015. The same year, remittances from Mexican nationals working in the United States totaled nearly $22 billion — the most since 2009. During the current Mexican president's term, the country has also opened additional avenues for foreign investment into sectors formerly closed to large inflows of foreign capital, and it has made major changes to its regulatory regime in the hydrocarbons and electricity sectors to break state monopolies, many of which have become costly and uncompetitive.
Overall, Mexico's next few years will be quite bright. Its economy will continue benefiting from foreign investment to fund manufacturing initiatives to supply the U.S. domestic market. The growing energy trade between the United States and Mexico will also ensure secure electricity supply that will further drive manufacturing growth. Still, security concerns will persist as funding for anti-crime measures becomes less reliable.
