The Report: Mexico 2014
Although the country was hard hit by the effects of the global financial crisis in 2008-09 due to its close links to the US, at first the economy began to recover – albeit slowly. In 2012 GDP rose by around 3.6% although it slipped to a level of less than half that much in 2013. Central Bank estimates in November 2013 put GDP growth for the year at between 0.9% and 1.4%, with a forecast for 2014 of 3%-4%.
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Country Profile
More than a decade of multi-party elections have consolidated Mexico’s transition to democracy, while the current administration’s ambitious reform agenda promises to take the country to its next phase of development. In less than two years in office, the government of Enrique Peña Nieto has accomplished a great deal. Radical changes in education, telecoms and energy, among other areas, aim to bring dynamism to the economy and have attracted significant global attention along with foreign investment. With 12 foreign trade agreements involving 45 countries, Mexico has one of the most globally integrated economies in the world. Nonetheless, significant challenges remain for the second-largest economy in Latin America. High poverty and inequality rates, as well as drug-related violence, continue to hamper social development. This chapter includes interviews with President Enrique Peña Nieto; US President Barack Obama; Luis Videgaray Caso, Minister of Finance and Public Credit; and José Antonio Meade Kuribreña, Minister of Foreign Affairs.
Explore chapterEconomy
Despite being deeply affected by the global financial crisis of 2008-09, Mexico’s economy had been recovering since 2010, growing 5.1% and around 4% in 2011 and 2012, respectively. A steady recovery was interrupted in 2013 by growth of just 1.1% as a result of weak exports and a contraction in the construction industry. Overall export growth slowed from 6.1% in 2012 to 2.6% in 2013, shaving about three-quarters of a percentage point from GDP growth. A fall in oil prices dragged down the value of oil, one of Mexico’s most important goods, contributing to a 6.2% decrease in oil exports in 2013. While informality, inadequate government revenues and deficient domestic supply chains continue to plague the economy, the current government’s series of ambitious reforms, specifically for energy, telecoms and education, seem set to improve the economy’s competitiveness. This chapter includes interviews with Ildefonso Guajardo Villarreal, Minister of Economy; Francisco González Díaz, General Manager, ProMéxico; José Ángel Gurría, Secretary-General, Organisation for Economic Cooperation and Development (OECD); and Enrique García Rodríguez, Executive President, CAF development bank of Latin America.
Explore chapterBanking
Mexico’s banking system has been experiencing a period of stability unseen in its recent history. With sound and well-capitalised banks, the task now seems to be improving Mexico’s low banking and credit penetration. Domestic credit as a proportion of GDP stood at 47% in 2013, according to the World Bank, well below the average of 75% for Latin America and lower than Brazil (111%), Chile (108%) and Colombia (73%). Commercial banks hold 51.7% of assets in the financial system, with total assets reaching $505.05bn in December 2013, 8.8% above the $466.89bn in December 2012. Credit was the most important contributor to assets, accounting for 46% of the total, or $235.4bn. Following a financial reform in early 2014, significant changes to the system are expected over the next few years. This chapter includes an interview with Alejandro Valenzuela del Río, CEO, Grupo Financiero Banorte.
Explore chapterCapital Markets
Low macroeconomic volatility, stable exchange rates and efficient management of the economy and public finances are some of the factors behind the growth of Mexico’s capital markets and the record number of initial public offerings announced in 2013. With the second-largest stock exchange in Latin America, Mexico’s recent performance showed growth in volume as well as in value. In 2013, the volume of shares negotiated on the Bolsa Mexicana de Valores (BMV) was 96.4bn, reaching a value of $282.05bn, and up 8.3% on 2012. Optimism about structural reforms and an improvement in the credit rating from international agencies are attracting foreign capital and making financing cheaper for the government and companies alike. The Latin American Integrated Market, a joint stock exchange that integrates stock markets from Peru, Chile and Colombia, could become another channel for the internationalisation of the BMV as early as 2014. This chapter includes an interview with Luis Téllez Kuenzler, Chairman & CEO, Bolsa Mexicana de Valores.
Explore chapterInsurance
2013 was not a memorable year for the insurance sector in Mexico, given the country’s overall slower economic growth. Enhancing Mexico’s low rate of insurance penetration has proved a challenge. With a premiums-to-GDP ratio of about 2% – compared to 5% in Brazil – the insurance penetration rate is one of the lowest in the Latin American region. In 2012 only 22% of the adult population was covered by some kind of insurance. In 2013 insurance companies in Mexico held $72.06bn in assets, corresponding to 5.7% of national GDP. While life insurance remains the main segment of the market, the automobile and health segments hold particularly promising potential, the latter favoured by the fact that many people in Mexico do not have access to health care. Implementation of key legal reforms and their effects on firms and the sector as a whole will be central to growth prospects going forward.
Explore chapterEnergy
A key sector of the Mexican economy, the energy industry is set to undergo radical changes as a result of the structural reform passed by the government in 2013. The reform will open the nationalised oil industry to foreign investment, allow for open competition in the electricity market, enable private companies to build natural gas pipelines with more freedom, and will give producers of clean energy better access to customers. For the first time in decades, the energy reform is set to break the existing monopolies in the oil and electricity segments. While the government estimates the energy reform will add between 0.5% and 1% to GDP each year between 2014 and 2018, the end of the current administration’s term, this could be an overstatement of the short-term effects of the reform. Other estimates point to a boost to the economy of between 1.5% and 1.7% on average per year from 2017 to 2030, with a lesser benefit in the early years of this period and a larger one later on. This chapter includes interviews with Pedro Joaquín Coldwell, Minister of Energy; and Emilio Lozoya Austin, Director-General, Petróleos Mexicanos (PEMEX).
Explore chapterIndustry & Mining
At 17% of GDP, manufacturing is a pillar of the Mexican economy. More than at any point in the past 15 years, Mexican industry is today able to compete with China as a low-cost manufacturing alternative and with other high-income markets as a viable location for outsourcing sophisticated manufacturing. This is perhaps the most promising time for Mexican manufacturing since NAFTA was implemented 20 years ago. The story of the moment is Mexico’s surpassing China in labour cost competitiveness, a phenomenon that is hard to precisely quantify but whose consequences should be easy to see in the coming years. Moreover, reform in the energy sector has the potential to reduce costs in the long term, thus addressing one of the manufacturing industry’s greatest challenges. This chapter includes interviews with Ernesto M Hernández, President and Managing Director, General Motors de México; Louise Goeser, CEO, Siemens Mesoamérica; and Xavier García de Quevedo Topete, President, Minera México.
Explore chapterQuerétaro
Despite accounting for just 1.7% of Mexico’s population and 2% of the economy, Querétaro is, in many ways, a picture of the country Mexico wants to become. Home to more than a dozen universities that work closely with local industry to produce a qualified workforce, Querétaro also stands out in terms of security and links to population and transport centres. The state government aggressively courts foreign direct investment (FDI), securing $500m-$700m annually in recent years. Querétaro’s economy is estimated to have grown 4.5% in 2013. Manufacturing accounted for 27% of the state’s economy in 2012 and more than half of FDI between 2010 and the third quarter of 2013. Of the manufacturing total, the automotive sector represented 33%, as well as 9% of state GDP. Querétaro is a state to watch as an economy in its own right and as an example of the path Mexico may follow. This chapter includes an interview with José Calzada Rovirosa, Governor of Querétaro.
Explore chapterBaja California
The farthest north-west state in the country with a total population of over 3.3m, Baja California’s access to tangible resources – natural gas, water and electricity – and a qualified workforce distinguish the state from other investment regions. The state’s GDP saw a decrease of more than 8% in 2009 due to the economic crisis in the US. Despite this setback, economic recovery has been under way since 2010 with a 2.2% recovery, 4.4% growth for 2011 and 4.2% for 2012. In 2012 the state’s main economic activities by GDP were manufacturing and commerce, with shares of 19.4% and 16%, respectively. Total foreign direct investment was reported at $771.1m for 2013, growing 30% over 2012 figures. By continuing to support education and industry integration, the state could be set to see a shift from manufacturing to the development of an innovation- and research-driven market in the medium-term. This chapter includes an interview with Francisco Arturo Vega de Lamadrid, Governor, Baja California.
Explore chapterResearch & Innovation
As the government attempts to open strategic sectors of the economy to competition and attract more foreign direct investment (FDI), much is also being done to improve science and research as a means to spur innovation. Increased spending, coupled with changes in regulation, is expected to fuel the growth of start-ups and make the business environment more dynamic. The current government has stated its goal to raise annual expenditure on science and technology from its current 0.4% of GDP to at least 1% of GDP by 2018. Upon assuming office in late 2012 President Enrique Peña Nieto also announced the creation of a high-level committee to advise him on scientific matters and assist in designing reforms for the sector. With political discourse increasingly echoing the position that Mexico’s future economic growth will depend on businesses’ capacity for change, research and innovation should gain more prominence in the near future. This chapter includes an interview with Raúl Gallegos, President and CEO, General Electric México.
Explore chapterICT & Media
The telecoms industry, which includes fixed and mobile communications as well as pay TV, saw its revenues expand from $26.6bn in 2009 to $34.7bn at the end of 2013. After years of underinvestment and a market structure that has stifled service penetration, a reform to reduce the influence of dominant players in the telecoms market is set to increase competition, facilitate wider access and put downward pressure on prices. The IT sector now accounts for 6-7% of GDP and is expected to grow rapidly as constitutional reforms reshape the industry. Exponential growth has attracted international players and allowed for the emergence of an established domestic IT industry. However, asymmetric market conditions have made Mexico one of the least-connected countries in the region. There are approximately 40m internet users in Mexico, but only 17% of its 117m people currently have internet access at home. For telecoms firms in particular, the untapped market for additional services is increasingly attractive. This chapter features interviews with Gabriel Oswaldo Contreras Saldívar, President Commissioner, Federal Institute of Telecommunications; and Ankur Prakash, Executive Vice-President, TCS Latam.
Explore chapterConstruction & Real Estate
Mexico’s construction industry had a difficult year in 2013. After growing 4% in 2011 and 1.9% in 2012, the accumulated losses for the sector during the first nine months of 2013 amounted to a 4.5% reduction in construction activity. An acceleration of government spending before the end of the year allowed the sector to finish with a more modest reduction of 2% in construction activity, with the sector accounting for 7.6% of GDP in 2013. The homebuilding sector has been the worst affected. Reeling from a crisis that left some of the country’s largest home builders in bad shape, the real estate sector is finding ways to grow in other segments. Investment coming through new property trusts is pushing the sector to rally around more profitable markets, while demand for office, industrial and commercial space continue to sustain the real estate sector. This chapter includes an interview with Alonso Quintana Kawage, CEO, Empresas ICA.
Explore chapterLogistics & Transport
As new constitutional reforms start to take shape, Mexico is investing heavily in its transport and logistics infrastructure. Increased economic activity has put pressure on the existent road and rail networks, prompting the current government to assign a bigger slice of the federal budget to the improvement of connections by land, sea and air. Total investment (public and private) in the transportation and communications sectors is expected to reach $99.45bn between 2013 and 2018. Between 54% and 57% of all of Mexico’s cargo depends on road transportation. In the coming years the government plans to add some 19,000 km of roads to the existing 377,000 km, alongside improvements to urban transportation, airports, ports and rail system. With its eyes set on becoming a regional transport hub, the government hopes a new public-private-partnership law, published in early 2012, will help attract more private investment into the sector.
Explore chapterTourism & Entertainment
Selected by the current government as a pillar for growth, the tourism sector contributes more than 8% to national GDP and is the fourth-most-important source of foreign currency. With the exception of 2009, tourist arrivals have increased steadily from 22.9m in 2008 to 23.7m in 2013. Foreign exchange inflows generated by the sector also registered an increase of 8.5% in 2013, reaching a record $13.8bn, 3.4% higher than the previous record of $13.37bn in 2008. However, despite positive growth in the past few years, Mexico’s tourism sector has lost competitiveness in the international arena. A combination of internal insecurity and a deficient transportation network remain its most significant challenges. Nonetheless, with the current administration’s policies to diversify both the tourist offering and source markets, the sector should be able to regain some of the competitiveness lost in recent years and develop segments, such as cultural tourism, which until now have been underexploited. This chapter includes an interview with Claudia Ruiz Massieu, Minister of Tourism.
Explore chapterAgriculture
For the past decade the agriculture sector has grown marginally – at an annual average rate of 0.9% – as the rest of the economy continues to industrialise. Its contribution to national GDP was estimated at 3% in 2013, down from 3.4% the previous year. The prevalence of small-scale farmers, limited financing options and widespread rural poverty are some of the factors behind the slow pace of expansion. In the past three years adverse climatic conditions have also affected the sector. While some segments of the Mexican agricultural sector, such as fruits and vegetables, have benefitted from the North American Free Trade Agreement (NAFTA) since 1994, others, namely grains, have been adversely affected by increased competition with highly subsidised and efficient US producers. Efforts to diversify export markets, coupled with production-oriented policies and an agrarian reform to be announced in 2014, could bring some much-needed dynamism to the sector. This chapter includes an interview with Luis Rebollar González, President and General Manager, DuPont México, Central America & Caribbean.
Explore chapterHealth
In a little more than a decade since the introduction of the Popular Health Insurance Scheme, Mexico has made vast strides in extending coverage and is now closer than ever to attaining universal coverage. Nonetheless, rapidly changing demographics have boosted demand for medical services and put significant pressure on the sector, which is now faced with the task of increasing capacity to effectively meet health care needs, while expanding access in rural and remote areas where infrastructure is lagging. But even though health expenditure has increased in the past few years, at 6.3% of GDP it remains below the OECD’s average of 9%. The past few years have also seen a marked expansion of the private sector, along with significant growth in sub-sectors such as pharmaceuticals, medical devices and medical tourism. A sector reform already announced for 2014 is expected to increase integration and reduce the fragmentation that has beset the sector.
Explore chapterEducation
Despite education spending in line with OECD standards, the quality of Mexico’s school system has lagged significantly behind the organisation’s other members. In large part this has been due to a powerful teachers’ union, which has traditionally stood in the way of efforts to reform the sector. Having made considerable advances in extending coverage, particularly at the basic education level, the attention has now shifted towards improving quality. The structural reform passed in 2013 aims to establish a results- and performance-based educational model. While educational results will take a few years to be noted, the reform lays the foundation for a model based on evaluation and development. The sector, which was selected as a pillar for economic and social development in the National Strategic Plan 2013-18, should be set to support further professionalisation of the country’s workforce. This chapter features an interview with Jesús Ancer Rodríguez, Rector, Universidad Autónoma de Nuevo León.
Explore chapterTax
The financial reform that became effective in January 2014 not only increased the tax base but also introduced several changes to the Mexican tax system. Featuring an interview with Carlos Méndez, CEO, PwC México, this chapter provides an overview of the recent tax reform, covering areas such as income tax, taxes on dividends and capital gains, among others.
Explore chapterLegal Framework
The year 2013 was one of legal reforms in Mexico. The political agreement Pact for Mexico enabled the enactment of a number of key changes since President Enrique Peña Nieto took office in 2012. Featuring a viewpoint from Amílcar Peredo Rivera, Partner, Basham, Ringe y Correa, on what to expect from the recent, wide-ranging legal reforms, this chapter explores the effects of the energy, telecoms, financial and labour reform.
Explore chapterThe Guide
In addition to an article on the highlights of Mexico City’s vast array of museums, this chapter contains useful information for business and leisure travellers, including a list of hotels, phone numbers for important government ministries and agencies, business associations and foreign missions.
Explore chapterTable of Contents
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