American conceptions of Mexico usually focus on the country's poverty and the endless flow of illegal immigrants to the U.S. But another Mexico is starting to emerge: a middle-class nation where millions have access to mortgages, solid jobs provide security, and a class of strivers saves to put its kids through college (page 52). This has the makings of a much more stable Mexico, and a much more lucrative market for U.S. companies. "We're very interested in the Mexican middle class," says Edmundo Vallejo, chief executive of GE Latin America, a big provider of consumer finance.
The ranks of that middle class, or those making between $7,200 and $50,000 a year, have swelled to record levels of around 10 million families. That's equal to nearly 40% of all Mexican households, vs. 30% just a few years ago. It helps that for almost a decade now, wages have been rising faster than inflation. In addition, women are having fewer children, and more of them are joining the workforce, giving households more money to spend and save.
Homeownership is the other key factor in Mexico's transformation, because it allows families to build equity, establish credit histories, and move up the economic ladder. The country is in the grips of a housing boom that is reminiscent of America's post-World War II expansion. A record 560,000 new mortgage-financed homes were built last year, almost double the number in 2000, and 750,000 more are expected for 2006.
This is a huge change from Mexico's recent history, when a series of economic crises caused the middle class to shrink. Over 25 years, steep currency devaluations periodically sent inflation and interest rates soaring, wiping out Mexicans' purchasing power and forcing many to default on their mortgages and other debt. Even after the peso stabilized, banks refused to make home loans, and consumers had to spend years amassing the cash to buy a home.
But annual inflation is down to 3% now, and interest rates have been falling steadily. Rates on 20-year fixed-rate mortgages are 9% a year. To Mexicans who just two years ago faced rates of 18%, that's a huge improvement. Banks big and small are tripping over one another to offer mortgages.
U.S. companies are in the thick of the action. "We are seeing brutal competition among the banks," says Juan Lerdo de Tejada, consumer assets director for Citigroup (C
)-owned Banamex, Mexico's second-largest bank. That's great for consumers as rival banks lower their rates, but it's also giving Banamex plenty of opportunities. Banamex' mortgage portfolio is set to hit $2 billion by the end of 2006, from just $100 million three years ago.BRACKET CLIMBERS
It's not just mainstream banks that are cashing in on the lending boom. General Electric Co.'s (GE
) consumer finance unit has its eye not only on the 10 million families considered solidly middle class but also on those migrating from working-class status to a higher income bracket. To reach them, it has opened 194 storefront GE Money outlets around the country that offer cash loans from $100 to $1,100, credit cards, auto loans, insurance policies, and even home mortgages. GE also administers the credit-card program for Wal-Mart de México (WMMVY
), the nation's biggest retailer, and for most other department stores.
The current wealth of Mexicans surprises even a savvy player like GE. "We recently introduced mortgages for vacation homes at beach resorts and thought most of our customers would be Americans," says Farouk Salim, general director of GE Money in Mexico. "But a year ago we started seeing the Mexican middle class buying [these] second homes." Mexico is now among the top 10 countries in the world for GE's consumer finance business, and Salim says it should move into the top five within three years.
As rates continue to fall, Mexicans are buying more than homes. A record 1.13 million cars and small trucks were sold last year, up 33% from the year 2000, with Ford (F
), General Motors (GM
), and DaimlerChrysler (DCX
) accounting for half of all sales. Smaller-ticket items are flying off the shelves. "Sales of home appliances have tripled in the last 10 years," notes Ernesto Cervera, director of Grupo de Economistas y Asociados, a think tank in Mexico City. "Who's buying all those 37-inch TVs at Sam's Club? The middle class." There's even money left over for small luxuries like tickets to sporting events and concerts. In Mexico City and Monterrey, 140,768 tickets for two recent U2 concerts, with prices ranging from $10 to $220, sold out in less than five hours. "There is more disposable income nowadays," says Jaime Zevada, chief financial officer of Corporación Interamericana de Entretenimiento, a Mexico City events and concert organizer. Normal stuff north of the border, but a major change in a country that has endured so many crises. By Geri Smith