Investment Opportunities in Nuevo León

Mexico ensures growth in Nuevo León in wake of stricter public financing controls

Posting growth of 4.26% in 2015, Nuevo León remains well above the national average of 2.53%, with construction, transport, and financial services and insurance displaying the strongest levels of growth. Although manufacturing has experienced a slight decline in recent years, it remains the chief productive sector of the state, according to the latest available data from the National Statistics and Geography Institute ( Instituto Nacional de Estadística y Geografía e Informática, INEGI), accounting for 23.17% of GDP in 2015.

The 2016 US election results, though, have cast some uncertainty over the future of US-Mexico trade relations. While the US is Nuevo León’s chief trading partner, the state has set its sights on ensuring long-term growth through a variety of initiatives. This includes supporting the mining sector, investing in infrastructure – especially transport and energy – and boosting productivity and competitiveness through investment in research and development (R&D) and innovation.

Geography & Climate

Located in the north-east of the country, Nuevo León shares a border with Texas to the north, Tamaulipas to the east, San Luis Potosí and Zacatecas to the south-west and Coahuila de Zaragoza to the north-west. Its land surface, covering a total of 64,156 sq km, represents 3.27% of Mexico’s territory.

While roughly 68% of Nuevo León’s climate to the north and south is either arid or semi-arid, another 20%, chiefly along the northern Gulf Coastal Plain, is considered sub-humid warm. In the high reaches of the state’s mountain ranges it is temperate sub-humid, while the region near the Sierra Madre Occidental, a major mountain range running from Mexico’s northwest to its south-east is very dry. The average annual temperature in the state stands at about 20°C. The average maximum, extending from May to August, is 32°C, while the average minimum, usually attained in January, is 5°C. Average annual rainfall, meanwhile, is estimated at 650 mm, with rains commonly occurring in the summer months, from August to September.

History

A diverse set of tribes, including the a large group of the Chichimecas – a general category identifying indigenous people living in the north of Mexico – inhabited the geographic area that was later to become Nuevo León in pre-Hispanic times. Álvaro Núñez Cabeza de Vaca is said to be one of the first Spaniards to have set foot in the region in 1535, although it was not until 1577 that Alberto del Canto discovered and founded Santa Lucía, a settlement that later blossomed into today’s state capital, Monterrey. Nuevo Reino de León, or the New Kingdom of Leon, emerged in 1582 with the arrival of its settler and governor, Luis de Carvajal y de la Cueva, who claimed it for Spain.

The region was for many years slow to develop due to several factors, including in particular a lack of natural resources, indigenous resistance and floods. Nuevo León also suffered through several periods of political upheaval. Having achieved independence in 1824 with the proclamation of the Federal Constitution of the United States of Mexico, Nuevo Reino de León became the Free and Sovereign State of Nuevo León. Similar to much of the country, Nuevo León witnessed several periods of revolution and counter-revolution. It was invaded by the US in 1846 and imperial French Maximilian forces occupied it in 1865.

As the political situation settled down over time the state started to grow economically, particularly flourishing in the 1890s, with the onset of industrialisation, specifically in textiles and manufacturing, and the development of communication and transport infrastructure. Today, Nuevo León has more than 150 industrial parks, two international airports and a growing road and railway network.

Politics

Nuevo León is one of 32 autonomous entities in Mexico; 31 states and Mexico City. As do the other states, Nuevo León elects its government every six years for a limited single-term period. The state legislature, a unicameral body, and local authorities are elected every three years; however, pursuant to a package of constitutional reforms approved by Congress in December 2013, and subsequently published and enacted in February 2014, state legislators and local authorities can run for re-election. In reality, local constitutions must now guarantee their rights to run again for office, specifically an additional period for municipalities, and up to four periods for state legislators.

Jaime Heliodoro Rodríguez Calderón, informally known as “El Bronco”, is the state governor, taking office in June 2015 after winning 48.8% of the ballot. He is the first independent candidate to secure a governorship in Mexico, overcoming the candidacies of the country’s two largest parties – the National Action Party (Partido Acción Nacional, PAN) and the Institutional Revolutionary Party (Partido Revolucionario Institucional, PRI), with the latter running in a coalition under the campaign name and slogan Alianza por tu Seguridad (Alliance for Your Security). El Bronco is a former member of the PRI, having left the party in 2014 to run for governor as an independent candidate.

The state legislature is composed of 42 local deputies. PRI and PAN obtained a majority of seats in 2015, gaining 17 and 16 local representatives, respectively. The rest was distributed among a diverse set of smaller political parties and movements.

Additionally, Nuevo León has 51 municipalities. According to the local press, the protest vote surfaced strongly in elections for local authorities in 2015, with 47% of incumbents losing their re-election bids. Alliance for Your Security unseated PAN in Monterrey.

Breaking Down Growth

Of all the states, Nuevo León is one of the biggest contributers to national economic growth. According to INEGI, Nuevo León contributed a total of 7.53% of Mexico’s GDP in 2015, as measured by current prices, ranking third behind Mexico City, at 16.74%, and Mexico State, with 9.47%. Measured in 2008 constant prices, Nuevo León state itself is estimated to have expanded by 4.26% in 2015, standing above the national average of 2.53%.

While traditionally industrial, the tertiary sector today accounts for a larger part of economic growth in Nuevo León, representing 60% of its total GDP in 2015 compared to the 1% and 39% generated by the primary and secondary sectors, respectively.

Nuevo León’s chief economic sectors, as measured by their share in state GDP and based on 2008 constant prices and 2015 INEGI figures, are manufacturing industries (23.17%), commerce (16.29%), construction (11.49%), real estate services (10.17%), transport (8.05%), financial services and insurance (6.17%), business support services (4.28%) and education services (2.49%). Of these sectors, construction posted the strongest growth, at 19.44% in 2015, followed by financial services and insurance (8.37%), transport (6.44%), real estate services (5.46%), education services (5.04%) and business support services (0.75%). In contrast, both manufacturing industries and commerce showed negative growth, at -0.19% and -0.90%, respectively.

Economic Slowdown

Latest available quarterly figures from INEGI indicate that economic activity in Nuevo León grew by 0.4% in the third quarter of 2016, recording year-on-year (y-o-y) growth of just 0.5%. This is a marked slowdown compared to quarterly growth of 0.6% and y-o-y growth of 3.8% recorded for the third quarter of 2016. Breaking this down into sector performance, in the third quarter of 2016 the primary sector is estimated to have contracted by approximately 3.5% y-o-y and the secondary sector by 5.1%. In contrast, the tertiary sector grew by around 4.0%.

The slowdown suggested by these third-quarter figures reflects a broader negative trend for the region that was already visible in early 2016, when the government of Nuevo León evaluated the economic situation in the state based on first-quarter data. Apart from sluggish domestic growth recorded in Mexico as a whole, Nuevo León has experienced declining external demand, which has in turn affected the performance of its industrial sector, most prominently manufacturing.

Population & Workforce

As of 2015 Nuevo León had an estimated 5.1m inhabitants, equivalent to 4.28% of the country’s total population. Its population has been growing at an even pace since 1990, posting 2.2% growth between 1990 and 2000, 1.9% between 2000 and 2010, and 2.1% between 2010 and 2015.

The population is largely concentrated in the centre of the state, especially in the capital, Monterrey, and its surroundings. The most populated municipalities are Monterrey, with 1.1m inhabitants, Guadalupe (682,880) and Apodaca (597,207). Together they are home to 46.7% of the state’s total population.

The median age in Nuevo León has increased from 24 years in 2000 to 27 in 2010 and 28 in 2015. Subsequently, there are now more people of working age (15-64 years old) in the state, specifically 67.3% of the population in 2015, against 65.2% in 2000.

According to the latest data from the Secretariat of Employment and Labour Productivity pertaining to the third quarter of 2016, about 2.4m of people over 15 years of age are economically active, with 2.3m in employment. Unemployment in Nuevo León stands at 4.3%, slightly above the national average of 4.0% while the informal labour market accounts for 35.3% of the population – the lowest rate in Mexico.

The share of economically active workers in the commerce and services sector increased from 56.3% to 63.3% between 2000 and 2015, whereas that of workers in the industrial and construction sectors diminished from 37.2% to 32.8%. Agriculture saw its share reduced over time as well, from 3.3% to 1.6%.

Education

Nuevo León has a solid primary education base. According to the National System of Education Statistics Information, primary education coverage (six to 11 years old) in the 2016/17 academic year stood at 105.5%, with a net primary schooling rate of 97.5%. Secondary education (12 to 14 years old) is also strong, with a coverage of 104.8% in 2016/17 and a net schooling rate of 92%. However, higher-secondary education (15 to 17 years old), with a coverage of 73.1% and a net schooling rate of 59.7%, lags behind, although it has shown improvement in recent years, with coverage expanding by approximately 6.5 percentage points since 2014/15. The state government has made higher-secondary education mandatory, which should help to further improve this trend in the future. More generally, INEGI data indicates that the total number of years students aged 15 and older spend in school increased from 8.8 to 10.2 years between 2000 and 2015.

At the university level Nuevo León is known for having a select number of high-ranking institutions. Concentrated in Monterrey – a growing higher education hub – these educational establishments represent a clear asset to the economic development of the state, contributing to the advancement of R&D and innovation and boosting Nuevo León’s investment attractiveness (see analysis).

“A high level of education in Nuevo León is attracting companies to settle their activities within the state,” Luis Gerardo Castro Coronado, general manager at Química Pumex, a polyurethane production company, told OBG. “The relationship between universities and clusters is critical to helping the industrial sector improve its competitiveness.”

Research & Innovation

In 2009 Nuevo León adopted the Law of the Support to Knowledge and Technology for Development in the State of Nuevo León, which determines that the state shall allocate 1% of its budget to science, technology and innovation through government programmes, and establishes the basis for supporting the development of a knowledge-based society and economy.

While Nuevo León has yet to meet the 1% budget allocation mark, it contributes a greater-than-average percentage of GDP to the fields of science, technology and innovation, at 0.8% compared to 0.4% at the national level, according to the PED Additionally, Nuevo León state appears to be making progress in innovation. According to the State Competitiveness Index compiled by the Mexican Institute for Competitiveness (Instituto Mexicano para la Competitividad, IMCO), Nuevo León ranked fifth in the country in terms of innovation in economic sectors in 2014, an improvement from sixth place in 2012.

Yet there is still room for improvement. “R&D is a division that companies have to take into consideration differently,” Enrique Noche, COO at Luvata, a metal solution manufacturing company, told OBG. “The goal of manufacturing companies is to reach an optimum production process so, thanks to innovation, they can reduce production time or take better advantage of waste, achieving greater efficiency.”

Game Raising

Competitiveness is improving, not only in terms of innovation but also in the state as a whole, as measured by both international and national indicators. The World Bank’s “Doing Business in Mexico 2016” report ranks Nuevo León 13th out of 31 states plus Mexico City, which is a federal district. This is an improvement relative to the previous edition launched in 2014, which placed Nuevo León in 16th.

Commenting on the state’s growing competitiveness, Mario Parga, an economic and legislative analysis officer at the Chamber of Industry of Nuevo León (Camara de la Industria de Transformacion de Nuevo León, CAINTRA), told OBG, “This arguably reflects changes in the state’s regulatory framework, especially with the adoption of initiatives such as the one making it mandatory for new municipal and state-level regulation to go through a cost-benefit analysis before being approved.”

According to the World Bank, Nuevo León has climbed 10 positions in the starting a business category since 2014, snatching the pole position in 2016. The state has also displayed improvements in registering property, moving up from 17th place into sixth, and in enforcing contracts, going from 10th to ninth. However, Nuevo León remains in 27th position when it comes to dealing with construction permits, indicating a wider margin for improvement in this category.

Nuevo León’s IMCO ranking has also improved. Based on 2014 data, the institute’s latest report puts the state in third place, behind Mexico City and Aguascalientes. This represents an improvement compared to 2012, when Nuevo León ranked fifth.

Bolstering Finances

The strengthening of public finances is arguably the greatest factor contributing to the development of an appealing business environment in Nuevo León. In conversation with OBG, Eduardo Hernández, senior director for business and relationship management at Fitch Ratings, pinned the agency’s attribution of a positive long-term forecast to the state’s “BBB+” rating on a number of factors, including in particular the strengthening of the financial situation in the first semester of 2016, which resulted from Nuevo León’s growing income from federal funds and successful government efforts to boost tax collection and reduce public expenses.

“This change is largely the product of a series of quick government measures, adopted under the new administration and resulting in the improvement of tax collection, better control of public expenses and greater savings,” Hernández told OBG. “Moreover, Nuevo León has other strengths, including a favourable public debt profile and structure, limitations to the subscription of additional debt and strong economic results.”

On the downside, Fitch also registers other more negative factors, specifically the high leverage ratio and low sustainability of state debt, the elevated debt of decentralised entities, liquidity pressures related to short-term debt and contingencies associated with the payment of public pensions and retirements. It also mentions public expense pressures arising from such items as public security programmes and dependency on federal funding and other financing for investment.

Notwithstanding this, the government of Nuevo León is expected to continue its efforts to strengthen public finances through, for example, debt-restructuring initiatives to reduce debt burden over time. As of June 2016 long-term debt reached MXN38.2bn ($2.3bn). This reportedly represented 1.06 times the amount of available income generated in 2015. Short-term banking debt, on the other hand, reached MXN1.6bn ($96.4m) in the first half of 2016, down from MXN2.3bn ($138.6m) at the end of 2015.

Government Plans

The government of Nuevo León’s Economic Plan 2016-21 (Plan de Desarrollo Económico 2016-21, PDE) is aligned with the Strategic Plan for the State of Nuevo León 2015-30 and builds upon the State Development Plan 2016-21 (Plan Estatal de Desarrollo 2016-2021, PED) devised under the administration of Enrique Peña Nieto, president of Mexico, in coordination with key stakeholders.

Nuevo León has ambitious goals, seeking to boost economic growth, generate well-paid employment and reduce poverty. As outlined in the PDE, the government aims to create 73,000 jobs each year, meeting both market needs and poverty reduction targets. To this end, government estimates suggest that the state should target an annual growth rate of 8% and private investment growth of up to $24bn in 2021, the equivalent of 22.3% of GDP, up from $ 13bn in 2015 or 18% of GDP. According to the Mexican Social Security Institute, Nuevo León had generated a total of 65,575 jobs by the close of 2016.

The PDE is premised on the implementation of four main axes, which focus on the following: finance and support to micro-, small and medium-sized enterprises (MSMEs); deregulation and simplification of administrative procedures; supply chain integration; and liaisons with academia and the private sector aimed at generating necessary human capital.

In parallel to this, the government intends to develop six complementary strategies designed to do the following: increase federal fund access and usage: further regional development, especially through investment promotion; develop city communities and infrastructure, and provide support to the mining sector; boost transport infrastructure development; develop the energy sector; support the expansion of innovation and research; and foment tourism.

Attracting Investment

Promoting investment is a key component of the PDE, something that is highly valued by the private sector. “The government is key in foreign investment,” Mauricio Garza, CEO of Interpuerto Monterrey, an industrial park in Nuevo León, told OBG. “A competitive infrastructure system reduces business costs and increases companies’ efficiencies, an idea that needs to be enhanced further. Mexico counts on three relevant factors: a large number of free trade agreements, its proximity to a number of stable markets and a highly competitive workforce; all of which determine Mexican trade potential.”

Nuevo León is second only to Mexico City in terms of attracting foreign direct investment (FDI). According to official figures, the state accumulated about $43.6bn in FDI between 1999 and 2016 – 9.4% of the total registered during that period in the country.

In 2016 Nuevo León attracted $2.7bn in FDI, or about 10.1% of the nation’s total for that year. Although this is lower than the $3.02bn registered in 2015, it is a significant increase on the $1.55bn recorded in 2014. In fact, 2015 marked a record year for FDI in Nuevo León, thanks in part to the arrival of South Korea’s KIA Motors and related providers. In 2016 Nuevo León’s chief investors, posting over $100m investments and classified by country of origin, counted in their ranks the US ($988.8m), South Korea ($437.3m), Argentina ($292.1m), Spain ($282.6m), Israel ($177.6m), Germany ($137.1m) and Canada ($126.4m).

As for the sectors attracting FDI, latest available data indicates that the following areas attracted each more than $100m in 2015 alone: manufacturing industries ($2.02bn), construction ($354.8m), mass media information ($283.9m), transport ($164.9m), energy generation, transmission and distribution, gas and water distribution ($133.6m), and commerce ($101.7m).

Nuevo León is taking action to attract additional future investment and diversify the origin of investments. “The state government is deploying an investment promotion strategy, including such key actions as signing conventions with sector stakeholders, undertaking trade promotion missions, participating in international business fairs, reaching out to business publications and increasing digital media presence,” Héctor Samuel Peña Guzmán, undersecretary for investment and industrial development at the Ministry of Economy and Labour (Secretaría de Economía y Trabajo, SEDET), told OBG. “On top of this, the government is planning on setting up a regional investment promotion agency and revising FDI incentives.”

Incentives

Government incentives for investors currently range from payroll tax exemption and municipal lobbying to logistics facilitation and support to research and development, in addition to training programme discounts, training scholarships, supplier development, executive account services and language learning programmes. However, this is expected to change, as the current administration is in the final stages of reforming the Promotion of Investment and Employment Law, in order to offer companies more incentives and make the process easier and faster.

Strategic Clusters

The existence of mature clusters is another appealing feature of the state’s economy. Present in Nuevo León since 2004, the state currently has 13 clusters, which have a number of aims, including formulating strategic sector strategies rooted in coordination between academic institutions, the private sector and the government; establishing a common private sector front to align actions; developing a long-term sector strategy; and matching government projects with the real needs of industry and academia. “The success of clusters lies in the collaborative, triple-helix approach promoted between stakeholders to address sector specific problems,” Adolfo Mendoza Lozano, clusters specialist at the Universidad de Monterrey, told OBG. “The most mature clusters relate to such key sectors as automobiles, housing appliances and the agro-industry, whereas the youngest one – the energy cluster – was created in 2016.”

Fostering the creation and development of clusters in Nuevo León is seen as a key component of the state’s plan to achieve its goals under the PDE. Salim Maysen Garza, CEO at Macor, a steel processing company, told OBG of the benefits clusters can bring to the local economy. “First, they provide the perfect platform for professional education in coordination with universities and training programmes are efficient and precise, which leads to the faster development of sectors,” he told OBG. “Second, clusters enable sharing of knowledge in between firms, and lastly, the government’s connection to clusters helps companies grow and become more efficient. Thanks to clusters, the government is able to foster stronger commercial ties between the various members integrating these groups.”

Following the approval of landmark energy reforms at the federal level, in 2016 Nuevo León created an energy cluster, with the aim of addressing the sector’s challenges and take advantage of new investment opportunities including, in particular, energy generation and distribution in the state (see analysis).

Mining Sector Potential

Nuevo León ranks 21st for mineral production in Mexico. Its contribution to the sector’s overall value has diminished over time, falling from 0.7% in 2002 to 0.18% in 2013, albeit increasing modestly since then – to 0.22% in 2015. According to the Mexican Geological Service, in 2015 the majority of the state’s mining production comes from concessions in barite, dolomite, salt, silica sand and gypsum. With approximately 90,700 tonnes of barite and 101,000 tonnes of magnesite extracted that year, Nuevo León ranked first in terms of production for both minerals. The state was also the second-largest producer of limestone, talc and gypsum, and the third-largest contributor of rock aggregates and silica.

Nuevo León’s strongest potential lies in barite. In conversation with local press, Ernesto Lozano Martinez, secretary for regional development, explained that one of the Secretariat for Regional Development’s goals was to support mining, partnering with local barite producers in joint operations to respond to the high mineral demand in the US. Indeed, US barite consumption oscillates between 2m and 2.5m annual tonnes, of which it produces only 500,000 tonnes, importing the rest from China, Morocco and India. “...it is in that differential that lies our area of opportunity,” Martinez said, adding that, “Our goal is to churn out 20,000 to 30,000 monthly tonnes in two years to the south of Texas, especially to San Antonio.”

Given the high costs associated with the development of such mining projects, the currently limited public funding available and the fragmentation of mining operations in Nuevo León, the government is considering a development model involving five stakeholders, specifically investment funds, operators, the Trust for the Development of the Citrus Area of Nuevo León, landowners and claim owners, with a distribution of income profits and royalties that will hopefully attract more private investors.

Manufacturing

Manufacturing is Nuevo León’s top productive sector. In 2014 it accounted for 24.8% of the state’s GDP, above a national average of 17.7%, and represented 10.2% of all manufacturing in the country, ranking second in this sector at the national level, after Mexico State. Moreover, Nuevo León’s second-largest workforce lies in manufacturing, comprising a total of 568,962 people, as measured by INEGI in the third quarter of 2016. This represents 6.7% of the sector’s workforce at the national level.

The chief subsectors of manufacturing in Nuevo León, as measured by their respective contribution to the sector’s GDP in 2014, are computing, electronic and transport equipment (34.43%), the food industry (19.61%), basic metallic industries (18.09%), and oil derivatives and coal (11.32%). The first subsector encompasses a strategic area – the automotive industry. “The automotive industry is Nuevo León’s chief exporting sector, accounting for 34% of all exports from January to November 2016 and sending about 80% of its output to the US,” Manuel Montoya, general manager of the Automobile Cluster of Nuevo León, told OBG. “Until recently, Nuevo León mostly produced auto parts and commercial vehicles, especially buses and trucks, yet with the arrival of KIA Motors in 2016 production has expanded into light vehicles as well.”

Declining Exports

Despite the strength of manufacturing in Nuevo León, the sector has been experiencing something of a slowdown of late. INEGI figures for 2015 point to a 0.19 contraction in growth compared to 2014, with the share of manufacturing in state GDP declining to 23.17%. The latest available Economic Expectations Poll, published by CAINTRA in February 2017, suggested that the slowdown is expected to extend into 2017, despite a spike registered in January of that year, which saw CAINTRA’s production volume indicator register a slight increase, from 45.52 points in December 2016 to 48.09 points in January 2017. If the indicator surpasses the 50-point threshold, then the sector is deemed to be expanding.

However, according to CAINTRA, a key factor preserving the sector’s downward trend is declining exports. The chamber’s exports indicator fell from 50.52 points in November 2016 to 46.15 in December 2016 and then 45.39 points in January 2017.

While this decline is arguably due to lower US demand, there are other obstacles. Companies polled in January 2017 expressed particular concern about the growing price of raw materials, and its impact on the pricing of manufactured products and exchange rate volatility. In previous CAINTRA polls published online, companies also pointed to weak economic activity, insecurity and electricity tariffs as being top concerns.

Chief Trading Partner

The US is Nuevo León’s chief trading partner. Roughly 80% of the state’s total exports go to the US, as well as more than half of all exports in food, drinks and tobacco, textiles and footwear, plastics and rubber, non-metal minerals, basic metals, metal products, machinery and equipment, computing and communication, electric generation equipment, housing appliances, transport equipment and furniture, among others.

Transport equipment is by far the state’s chief export to the US, generating about $11.18bn (35.2%) out of a total $31.7bn of Nuevo León’s exports to the US in 2014 and $11.9bn (37.5%) out of a total $31.65bn in 2015, according to data provided by SEDET. The US also accounts for about half of all Nuevo León imports, while China accounts for 20%.

Change Of Pace

During his electoral campaign in 2016, US President Donald Trump promised to seek a renegotiation of the North American Free Trade Agreement (NAFTA) with Mexico. While the treaty, signed in 1993, also includes Canada, Trump has set aside the prospect of holding multilateral talks, focusing rather on bilateral negotiations set on improving terms of trade with its southern neighbour.

The president has also talked of placing a significant tariff on imports from Mexico, in an attempt to finance the construction of a border wall between the two countries, as part of attempts to curb immigration into the US. While there is still uncertainty as to when and how the current US administration will move forward on this, there seems to be little doubt among analysts that trade tariffs on Mexican exports to the US would be prejudicial to both US and Mexican companies, as well as any other Mexico-based enterprise exporting to the US. David Martinez Serna, an economic analysis and documentation officer at SEDET, told OBG, “Adverse US trade actions targeting Mexico would affect all companies involved in cross-border supply chains, developed gradually under NAFTA, including a diverse set of multinational providers and manufacturers.”

In the face of the present uncertainty, stakeholders in Nuevo León are waiting to see what the US will do, with a large number hoping that the expected elevated costs of springing from any adverse trade action may deter Trump’s administration from imposing high and mutually prejudicial trade tariffs.

Diversification & Productivity

In the meantime, many are looking to diversification in search of economic growth opportunities. “Diversification is the solution to fighting in a competitive market,” Humberto Garza, president of Evco Plastics, a plastics manufacturing company, told OBG. “The plastics industry offers numerous growth opportunities in niche subsectors, granting every manufacturer the chance of specialising in its own field,” he added. “Yet the sector faces challenges, including a high dependence on the US, as well as a need to develop a stronger economy to satisfy internal demand and improve infrastructure to increase the security level in the country.”

Other businesses are focusing on improving productivity to ensure long-term growth and remain competitive in the international markets. “During the last few years a large number of companies increased their production mainly thanks to exports,” Jorge Murrieta González, business developer manager at Cygnus, a test system manufacturing company, told to OBG. “However, technology has not been adapted, affecting the efficiency of local businesses. Nowadays, one of the main priorities of small and medium-sized enterprises (SMEs) is boosting business productivity.”

Indeed, boosting productivity to ensure good growth and competitiveness is arguably one of the key drivers behind the government’s push for the introduction of Industry 4.0 in Nuevo León (see analysis).

Codefront

The Corporation for the Development of the Border Zone of Nuevo León (Corporación para el Desarrollo de la Zona Fronteriza de Nuevo León, CODEFRONT), a decentralised state entity, is in charge of managing a number of border assets, including the Puente Colombia bridge connecting Nuevo León to Texas, which has been operating since 1991, as well as the adjacent 330-ha industrial park, named the Centre for International Trade Facilities.

Going forward, CODEFRONT is looking to expand its activities, emphasising the secure character of its services. In 2016 around 650,000 vehicles transited Puente Colombia – an 18% y-o-y rise. In 2017 the entity aims to increase this by a further 25%. “Our strategy is premised on continuing raising awareness about CODEFRONT’s assets, especially promoting Puente Colombia as a second-best alternative to Nuevo Laredo in terms of border crossings, as well as maintaining and improving infrastructure,” Hugo González, director-general at CODEFRONT, told OBG. “Puente Colombia, victor of the National Logistics Prize in 2016, is currently the only ISO 28000:2007 certified bridge, a certificate in supply-chain security and security procedures,” he told OBG. “Moreover, while usually ranking fifth or sixth in terms of crossings, Puente Colombia is in third position in terms of Customs revenue, as a result of the high added-value goods circulating through. And we are only operating at 35-40% capacity.”

Logistics Hub

Exploiting the potential of Puente Colombia is but one element of the state’s infrastructure development plan, which also aims to convert Nuevo Léon into a logistics hub. Infrastructure investment is seen as key to ensuring the state is able to maintain its competitiveness. “While Mexico´s industrial sector has strengthened significantly during past decades, lack of infrastructure keeps increasing our production costs, harming our competitiveness,” Rafael Muñoz, general manager of MESA, a refrigeration and air conditioning assembly firm, told OBG. “Infrastructure should catch up if we aim to increase current levels of international trade.” Speaking at the Investment Opportunities and Urban Innovation in Nuevo León event, hosted by the Americas Society and Council of the Americas in September 2016, Fernando Turner Dávila, state secretary of economy and labour, outlined a series of important transport infrastructure projects to this end.

In addition to the MXN2.5bn ($150.7m) La Gloria-Colombia cross-border road, the conclusion of which depends solely on federal funding, the government has its sights set on a number of other projects, including the completion of the Ferromex rail network, the transference of the rail terminal out of the metropolitan area, completing the metropolitan area’s own roadway arch, connecting Coahuila and Tamaulipas through Nuevo León, and building the Interserrana road.

The completion of important projects like these should contribute to the strengthening of Nuevo León’s competitiveness. For example, the Gloria-Colombia cross-border road, connecting Laredo in Texas to Monterrey is expected to increase commercial traffic crossing the Puente Colombia bridge by as much as 30% over the next five years.

Construction Financing

Private investment has been key in pushing forward infrastructure projects in Nuevo León in the face of tighter federal funding controls and limited state resources. José Francisco Gutiérrez, president of the Mexican Chamber for the Construction Industry in Nuevo León has said that he expects the sector to experience some difficulties in the short term, as a result of a 55% decline in federal funding assigned to infrastructure development in 2017. He told OBG that he expects a sector allocation of between MXN11bn ($663m) and MXN12bn ($723.2m) from state resources in 2017 which, while significant, in his view falls short of Nuevo León’s needs.

To keep the wheels turning the government has been promoting a number of public tenders, including the announcement in August 2016 of MXN4.8bn ($289.3m) of financing for 851 public works projects. To ensure full transparency in tendering processes there is a new online platform in development, which will allow authorities to divulge relevant information. As of August 2016 the platform More Transparent Nuevo León was in its second stage of development, which involves the creation of a state registry of contractors, and the rollout of an online portal to allow citizens to access information regarding tender programmes.

Banking

The banking sector plays a substantial role in financing Nuevo León’s economy. The state is home to several key financial institutions, including Banorte, Banco Base, BanRegio, Afirme and Bancrea. In 2013 these institutions accounted for approximately 17% of Mexico’s banking sector assets, and in that year Nuevo León was home to the most banking entities in the country, after Mexico City.

According to statistics from Banco de México, commercial banking credits in Nuevo León, as measured by performing loans, registered a y-o-y nominal increase of approximately 19.82%, against 12.69% at the national level, between September 2015 and September 2016.

More specifically, credits to the agricultural, forestry and fisheries sector, the industrial sector, and the services and other activities sector respectively registered a y-o-y nominal growth of negative 0.9%, 12.68% and 28.92% during the same period.

However, MSMEs often find it difficult to secure financing from the banks, due to either their informal character, lack of financial history or other reasons. According to local press reports, only 25% of commercial banks’ portfolios are dedicated to this segment. “The relationship between banks and SMEs has always been complicated,” Ernesto López, president of Bancrea, told OBG, which offers a specialised service for small businesses. “The services that banks are providing do not match the companies’ requirements. Mexico is lacking personalised banking products.” MSMEs reportedly account for 99.48% of business in Nuevo León.

Outlook

In the short term, US-Mexican trade relations since the US elections in November 2016 remain somewhat uncertain. And while the state government is making strides towards fiscal balance, this has limited its ability to funnel public investment into key projects, increasing the importance of attracting further private investment to move forward with development plans. Going forward, improving productivity and competitiveness through R&D and innovation is a priority to ensure long-term growth. Authorities in Nuevo León are well aware of this, as illustrated by the push to promote Industry 4.0. Such efforts are facilitated by the fact that the state is a hub for higher education and is focused on forging links between academia and the private sector through strategic clusters.

In this context, in addition to focusing on manufacturing, bolstering investment in areas such as mining and energy will be increasingly important. Already, reforms at the federal level are beginning to open up a variety of markets for private sector participation in the energy industry, with some movement already becoming visible in gas and electricity generation, especially in the areas of combined cycle and renewables.

 

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The Report: Mexico 2017

Nuevo León chapter from The Report: Mexico 2017

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