CEO Survey Analysis

En Español

From the cancellation of a part-complete international airport to the signing of a new free trade agreement with Canada and the US, in many senses events from the second half of 2018 still define Mexico’s economic trajectory in the first half of 2019.

New administration takes the reins

Following a landslide victory in July of last year, the administration of President Andrés Manuel López Obrador (widely known as AMLO) came to power in December 2018 with a promise to reform the economy through more inclusive growth, as well as by giving the government a more prominent role in setting the country’s growth agenda.

In light of his conclusive mandate of 53% of votes, AMLO has begun to impose his economic plan over recent months, taking a number of symbolic yet significant decisions, mainly focused on infrastructure.

These included the cancellation of Mexico City’s new Norman Foster-designed international airport, which was already over 30% complete, the temporary distribution of petrol by road instead of pipelines to combat fuel theft, and driving through bold plans to build refineries and railways in the country’s poor south-east.

In a highly dynamic political and economic environment, respondents to the fourth OBG Business Barometer: Mexico CEO Survey remain cautiously upbeat about this new normal. The government may have changed but, for the most part, the priorities of the private sector have not.

Faced with high interest rates and a brand new stock exchange, respondents to this latest survey continue to reiterate the need for strong institutions, innovation, infrastructure and collaboration between the public and private sectors, while also looking for new ways to access capital.

Drop in positivity despite renegotiation of NAFTA

At six months, in Mexico the transition time between presidents is one of the world’s longest. Naturally, this fosters uncertainty for the business community and, given the sharp ideological difference between the outgoing and incoming administrations, this uncertainty has been more pronounced than on previous occasions. Although 72% of respondents are still positive or very positive about local business conditions, this is a sharp drop from the 88% recorded in our previous survey, suggesting that the business community has lost confidence in the economy, even if only temporarily and marginally. This is in spite of the agreement in September and signing in November of NAFTA 2.0, officially known as the United States–Mexico–Canada Agreement (USMCA), the negotiation of which was a cause of major uncertainty for investors and business leaders at the start of the administration of US President Trump.

This slight drop in positivity is undoubtedly influenced by both internal and external factors. The above-mentioned lack of clarity in public policy during and following the transition to the new administration is perhaps the main domestic factor, in addition to a high number of external issues, from the ongoing trade war between China and the US, to the gradual slowdown of the US economy.

Research and development remains a priority

Given that the uncertainty of the global climate is largely outside the control of CEOs, their priorities will most likely lie with building the most productive and competitive companies possible – one aspect of which is the development of human capital.

For the fourth time, the categories of research and development (R&D), engineering and leadership lead the rankings, with R&D coming out on top for the third consecutive survey, 28% of respondents consider it the skill in greatest need. This suggests that business leaders still place importance on innovative skills to drive their companies and the economy forward, while acknowledging that this goes hand in hand with more practical capabilities, such as engineering-related technical skills.

In order to acquire agility and international clout, as well as a highly capable workforce, companies in Mexico need the financial muscle to produce innovative products with more added value, and thus become more integrated within global supply chains.

To obtain capital, Mexican companies have traditionally turned to loans, either from commercial banks or from one of the country’s development banks.

However, a notable result of the survey was that capital markets were the top financing mechanism, with 29% of respondents citing this as their preferred option. This is curious, given that Mexico has a low level of stock market activity relative to the size of its economy. Its market capitalisation, at 36% of GDP, is below the Latin America and Caribbean average of 42%, and significantly lower than the OECD average, of 127%. One possible explanation for this is the launch of the country’s long-awaited second stock exchange, the Institutional Stock Exchange – known in Spanish as the Bolsa Institucional de Valores, or BIVA – which began operations in July 2018.

Given that capital markets in Mexico have traditionally been seen as elitist by many small and medium-sized enterprises, this demonstration of popularity and understanding could mark a turning point for a country whose companies, bar a handful of multinationals, have largely been reluctant to turn to capital markets for financing.

From one pillar of economic growth to another, in an export-orientated economy such as Mexico’s, infrastructure forms the backbone of many companies’ internationally focused, export-led activities. Above any transport-related infrastructure requirements, the need to boost energy and social infrastructure is highlighted by 29% and 28% of respondents, respectively.

On the energy side, almost six years into the country’s constitutional reform of the sector, business leaders still see it as a priority, particularly given the strong correlation between areas with comprehensive energy connectivity and high economic growth.

This is particularly relevant for highly industrialised manufacturing areas such as El Bajío in the centre of the country or the city of Monterrey in the north. The promise of cleaner, cheaper energy is highly attractive to the power-intensive heavy industries in these regions.

The need for social infrastructure expressed by CEOs aligns closely with AMLO’s promises to reduce inequality through government programmes focused on improving social well-being. From a market-focused point of view, it is hoped that a greater emphasis on health and education infrastructure will give rise to a healthier, more productive and more innovative population, leading indirectly to a boost in long-term economic growth.

Calls for further expansion of public-private collaboration

From planning to construction to operation, regardless of how infrastructure is developed, one key to its development is the need for public-private collaboration. This was the main takeaway from OBG’s question about CEOs’ priorities for their sector.

Some 39% of respondents cite greater public-private collaboration as their top priority. While the last administration rolled out public-private partnerships in the construction of roads, hospitals, telecommunication and utilities infrastructure, the survey results suggest that business leaders hope for a wider scope of collaboration, perhaps going beyond financial and operational collaboration, to a more inclusive strategic discourse between public and private actors.

Also ranking highly were infrastructure and better-quality human capital, highlighting the need for Mexico to structurally develop its two fundamental economic drivers. Some 21% of respondents cited communications and transport infrastructure as a necessity to drive growth in their sector. Mexico’s connectivity has been boosted by the 2013 telecommunications reform, with 20m more people gaining access to the internet in the 2013-16 period alone.

This is in contrast to transport infrastructure development, which has lagged behind on many fronts. In light of the uncertainty over recent months following the transition of power, overall it seems that CEOs are calling on the government to build bridges, both physically and institutionally.

Given that responses to this survey were collected both during and after the NAFTA renegotiation, they give us a particular insight into varied narrative of business leaders’ perceptions. Before September 2018 CEOs’ principle concern was the outcome of the negotiations. In our previous survey, published in May 2018, the top external concern was NAFTA renegotiation, with 64% citing it as the most important external factor. In this one, the figure stands at just 14% if only responses from September are considered, the month in which the USMCA was agreed.

After September 2018, following an escalation in tensions between China and the US, CEOs’ top concern shifted to increased protectionism in global trade. This concern from leaders is somewhat unsurprising, given that Mexico’s economic growth largely relies on openness, with the country having 12 separate agreements with 46 countries, and could therefore be very vulnerable to a decrease in global economic connectivity.

In terms of priorities for the new administration, CEOs are unanimous that the focus should be on domestic affairs. Some 27% of respondents cite rule of law as the most important priority, followed closely by tackling corruption (24%) and stemming violence (19%). Compared to our previous survey more business leaders have shifted their position to focus on the need for stronger rule of law was up eight percentage points while tackling corruption was down 12 points. With many arguing that rule of law is the key to tackling both corruption and violence, this suggests there is appetite for a more holistic approach centred on building strength and transparency in institutions.