Economic Analysis World Cup Special: South Africa versus Mexico

June 10, 2010

The World Cup is one of the only genuine world-wide competitions in sport. NFL and NBA teams declare themselves, “World Champions,” but a World Cup champion possesses more than rhetoric.

Wall St. Cheat Sheet has recently teamed up with Chicago Mercantile Exchange commentator Jordan Roy-Byrne CMT to produce our new Global Investor Premium newsletter. To kick off the summer, we think it will be fun to do an economic analysis of the countries competing head to head in the World Cup.

Without further ado …

Game 1: South Africa vs. Mexico (June 11, 1600 EST)

South Africa (NYSE: EZA) has been a hot emerging market over the past decade. The country boasts the most advanced economy in Africa and is rich with natural resources in demand across the globe.

The South African economy has grown 3.6% a year since becoming a democracy in 1994 — 2 percentage points more per year than the 15 years leading up to regime change. However, the largest drawback has been the extremely high 24.3% unemployment rate.

After sanctions against South Africa ended in 1994, the country has become a savvy international trading powerhouse. For example, Asia and Africa currently account for 27% of South African exports.

Smart regulations heavily insulated South African banks from the global economic crisis. Moreover, infrastructure projects for the World Cup have helped buoy the rest of the economy.

South Africa’s debt-to-GDP ratio is in the 35%-40% range. That’s much healthier than all the countries with sovereign debt issues — including G7 countries such as the US, UK, and Japan. However, the country’s credit default risk as doubled since the start of 2008.

Mexico (NYSE: EWW) is another hot emerging economy, but GDP got blundered to -6.5% as trade dried up during the economic crisis. Since then, things have improved nicely for the country highly levered to manufacturing and exports.

Since opening its doors very wide through the North American Free Trade Agreement (NAFTA) in 1994, trade with Canada and the US has tripled.

One thing holding back Mexico is wages and poverty. Per capita income is ~1/3 that of the US. Further, asset-based poverty places 47% of the population below the threshold.

On a positive note, debt-to-GDP in 2009 was only 37.7%. However, the risk of credit default is up ~70% since the start of 2008.

Given Mexico’s economic dependencies, future prosperity is highly correlated to the strength of the global economic recovery — especially in the US which comprises over 80% of Mexican exports.

Disclosure: No positions.