MEXICO CITY Aug 8 Mexico could overtake Brazil as Latin America's number-one economy in 10 years, according to research by economists at Nomura.
Mexico could become a 'jaguar' economy, similar to the fast-growing 'tiger' economies of East Asia, if its newly-elected government succeeds in kick-starting lackluster growth with ambitious economic reforms, Nomura said.
Optimism about the chance of change in Mexico contrasted with reform fatigue in Brazil, where the government has wheeled out successive measures to boost local industry and protect exporters from a strong exchange rate.
The International Monetary Fund estimates Brazil has an economy twice the size of Mexico's at $2.4 trillion, but Nomura said the gap could disappear by 2022 if Mexico grows at the top end of the bank's forecast range and Brazil at the low end.
Over the next decade, Nomura forecasts average growth of 2.75 percent to 3.25 percent in Brazil and 4.25 percent to 4.75 percent in Mexico. If both countries grow at the low or high end of the range, Mexico would overtake Brazil in 2028-29.
"If Brazil doesn't pass any structural reforms and Mexico does, then the scenario 'Mexico high - Brazil low growth' seems the most likely," Nomura economist Benito Berber said.
If Brazil's economy grows at the top end of Nomura's range and Mexico at the low end, Brazil would keep the upper hand.
Incoming Mexican president Enrique Pena Nieto aims to lift annual economic growth to 6 percent by overhauling Mexico's labor market, state-run oil sector and tax base.
Brazil and Mexico have leapfrogged each other as Latin America's top economy in recent decades and Brazil moved back into pole position in 2005. While political stagnation in Mexico depressed growth, Brazil became the investors' darling, buoyed by demand from China for its commodity exports.
But Brazil has hit a soft patch. Economists polled by Reuters expect 2 percent growth in Brazil this year, a far cry from the 7.5 percent boom in 2010, and 3.7 percent in Mexico. The difference is helping to pull foreign investors into Mexican stocks and bonds.
A recent rush of new factory announcements, for Italian tire maker Pirelli, Volkswagen's luxury car unit Audi and U.S. carmaker Ford Motor Co, is also highlighting the country's advantages over China as a place to make goods for export to the neighboring United States.
"Mexico is the place to be for companies and investors," said Geoffrey Pazzanese, who co-manages Federated Investors' $523 million Federated InterContinental Fund. The fund has 12 percent of holdings in Mexico as opposed to 8 percent in Brazil.
But economists expect Brazil to pick up as early as the second half of this year, with the Reuters poll showing expected growth of 4 percent in 2013 - outshining Mexico's 3.5 percent.
"Brazil will probably re-accelerate to faster growth than Mexico over the next couple of years," said Pazzanese, noting that Brazil's economy was more cyclical than Mexico's.