CEO Survey Analysis

En Español

Since the election of Donald Trump in November 2016, the outlook for Mexico’s economy has been hit by bouts of both uncertainty and positive progress. Just a fortnight after announcing that the US would lift tariffs on Mexican and Canadian steel imports, and publicly willing Congress to pass the US-Mexico-Canada Agreement (USMCA) quickly, President Trump announced on Twitter that he would be imposing progressive tariffs on all Mexican imports to the US, beginning at 5% on June 10 and increasing incrementally to 25% by October 2019. Then, three days before the tariffs were set to go into effect, he called off the plans, citing an agreement to cooperate on immigration.

While US industry groups had criticised plans to impose tariffs, Mexican officials struck a calmer approach, engaging with President Trump’s Cabinet and advisors to negotiate a solution. They pointed to existing efforts to curb migration flows through their territory, and highlighted that a 5% tariff on Mexican goods would equate to an additional $17bn for the US annually, with a 25% tariff rising to $100bn in extra costs for consumers. Although President Trump wanted to push for speedy ratification of the USMCA, the latest back and forth on trade barriers could delay its ratification. While there were hopes the Mexican economy may soon be unshackled from a few of its external pressures, the episode has created more uncertainty for businesses and consumers on both sides of the border, alongside other ongoing issues such as US-China trade tensions and a global economic slowdown.

Mexico’s economy, although one of the region’s most stable, posted 2% growth in 2018 – a level many international observers claim is below its full potential. In its February report, the central bank, Banco de México, forecast GDP would grow by between 1.1% and 2.1% in 2019.

However, the current administration, led by left-wing populist President Andrés Manuel López Obrador (also known as AMLO) promised average annual growth of 4%, with plans to hit 6% by the end of his term in 2024. In order to achieve this sharp upturn, the country will need to boost investment across the board. Given the government’s self-imposed austerity measures, this will have to increasingly come from the private sector.

According to the fifth OBG Business Barometer: Mexico CEO Survey, C-suite executives suggest they have not been deterred by a challenging political-economic environment abroad, or slowing growth at home. Overall, respondents in our latest survey indicated that they were only somewhat less likely to make a significant capital investment than in our last set of results from February 2019, with those responding likely or very likely falling from 70% to 65%. Notably, the proportion of respondents who said they were very likely to make investments rose from 29% to 32%.

In spite of the uncertainty around the USMCA in recent months, the ongoing US-China trade war and the US president’s latest public statements on tariffs, the fact that nearly two-thirds of leaders are optimistic enough to invest significantly is a testament to Mexico’s ongoing appeal to the business community.

For the fifth time running, research and development topped the responses regarding the skill most in need, accounting for 32% of the total. This was followed by leadership with 26%. Interestingly, engineering – which was a common choice in previous surveys – has faded as a popular option, replaced by computer technology, which accounted for 12% . The top-three choices tell an interesting story about the direction business leaders see the skills base heading, centred on adding value to the economy through technology and new practices.

As such, CEOs also highlighted their preference for investment in social infrastructure, to ensure the economy can count on a healthy and well-educated population in subsequent decades. Some 29% chose this option as the most important longterm infrastructure development for the economy, followed by energy (27%) and airport infrastructure (25%).

Arguably, these results are closely linked to two key policies from the current administration. As part of his wider plan to involve the state more in the energy sector, AMLO has significantly limited the progress of energy reforms, suspending oil auctions to private companies, which he says he will not restart until output has risen. Coupled with this, after an unofficial referendum and citing corruption practices, in October 2018 he cancelled Mexico City’s new $13bn airport, which was more than one-third complete at the time. These decisions have been unpopular with the business community, largely because both energy and airport infrastructure are seen as two key factors in boosting Mexico’s economic growth, given their relevance
for a wide range of sectors.

As Mexico moves from infrastructure to innovation, business leaders from all sectors are looking to boost the technological capabilities of their companies. When asked “What will be the most disruptive technology in your sector over the short to medium term?”, answers were almost equally split between artificial intelligence (AI), with 21%, automation (21%) and big data (20%). Given Mexico’s developed industrial sector – in particular its automotive segment – automation seems like a natural choice. It is therefore striking to see that respondents chose AI as an equally relevant disruptive technology, especially given that it could be considered a more advanced technology than say, automation, which could be seen as the obvious next step for much of Mexico’s economy. Although the two are closely linked, this does seem to imply that CEOs’ ambitions in Mexico are more ambitious than the country’s current economic profile might suggest.

When it comes to internal political priorities, there was little change from previous surveys; respondents reiterated that improving rule of law (31%) and tackling corruption (23%) were top priorities. This is somewhat unsurprising, given that solid rule of law and a transparent, corruption-free environment are important for doing business in any country. Interestingly, however, improving health and education (17%) is now the third-most-popular choice, leapfrogging stemming violence, which received 11% of responses in the last survey. This change runs close to AMLO’s narrative that a low level of well-being in a given population is a direct cause of societal violence. Notably, all three of these priorities form part of AMLO’s economic
programme, the so-called National Development Plan 2019-24. This suggests that even if many business leaders are not in agreement with some of the administration’s policies, their overall developmental goals for the country are largely aligned.

Lastly, given that Mexico is a few months into a new six-year government, we gave CEOs the opportunity to voice their opinion on what the top foreign policy priority should be. Half chose “continue a globalist, multilateralist agenda”. Second, with 20%, was “maintain a civil relationship with the US”, with 17% arguing that the country should “manoeuvre closer to China”. While it seems that on a political level the current administration is pursuing a neutral foreign policy, with AMLO not attending June’s G20 meeting in Japan, it appears that the private sector will be the leaders in driving Mexico’s growth agenda abroad over the medium term, whether it be globally, with the US, China, Europe or the rest of Latin America.