The Report: Mexico 2015

At a time when a number of major Latin American economies, including Brazil and Venezuela, are heading toward recession, Mexico’s economy stands out in the region for its resilience. The country is expected to maintain a solid economic performance in 2015 and beyond, with the IMF estimating GDP growth of 3% and 3.3% in 2015 and 2016, respectively.

Country Profile

Since coming to power in December 2012, the government of President Enrique Peña Nieto has overseen the introduction of a series of sweeping reforms aimed at boosting the country’s economic competitiveness and attracting investment. Under the reform agenda, the energy sector was opened to private investment, while asymmetric laws were introduced in the telecommunications sector to increase competition. Meanwhile, the education sector saw the establishment of compulsory teacher evaluations and a fiscal reform led to the widening of the tax base. Despite the speed with which the reforms were passed, the momentum has slowed slightly as the government feels the effects of lower hydrocarbons revenues.

This chapter contains interviews with President Enrique Peña Nieto; Angel Gurría, Secretary General, Organisation for Economic Cooperation and Development (OECD); and Andrew Robb, Australian Minister for Trade and Investment.

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With a GDP of $1.26trn, Mexico is the second-largest economy in Latin America after Brazil and one of the most liberalised in the region. Though economic growth has been slow, ranging from 2% to 3% during much of the past decade, a series of reforms introduced by the government of Enrique Peña Nieto are expected to accelerate the pace of economic development in the medium term. While initial investor and market excitement over the structural reforms has been tempered by low oil prices and a degree of nervousness over the potential effects of monetary tightening in the US, Mexico is set for growth in 2015, with the economy expected to expand by 3%, according to the IMF, following estimated GDP growth of 2.1% in 2014.

This chapter includes interviews with Ildefonso Guajardo Villarreal (IGV), Minister of Economy; Luis Videgaray Caso, Minister of Finance and Public Credit; Francisco N González Díaz, Director-General, ProMéxico; and Juan Pardinas, Director General, Mexican Institute for Competitiveness.

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Mexico’s banking system has enjoyed two decades of growth and stability. Operating with comparatively high capital reserve levels, Mexico has a stable and profitable banking system. In the period from 2010 to 2014, the financial system as a whole grew at an average annual rate of 10%. As of March 2015 total assets in the commercial banking system stood at $541.8bn, with 45 active banks. The industry has a high level of concentration: the top six banks controlled 58.7% of total assets and 60.2% of the total loan portfolio. Recent adjustments to the regulatory framework, such as the 2014 banking reform, can be seen as fine-tuning an essentially robust industry framework. However, banking penetration remains low and financial exclusion indicators are comparatively high, with more than half the population not having a bank account.

This chapter features an interview with José Marcos Ramírez, CEO, Grupo Financiero Banorte.

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Capital Markets

Mexico’s stock exchange (Bolsa Mexicana de Valores, BMV) was heavily influenced by global trends during the course of 2014, marked by a high degree of volatility, geopolitical worries, concerns over future interest rate movements, and a somewhat mixed attitude to risk-taking. In Mexico, enthusiasm over the structural reforms was tempered in the fourth quarter of 2014 by worries over the impact of lower international oil prices. The BMV ended 2014 with market capitalisation of $480.2bn, down 8.7% in dollar terms, and remained somewhat subdued in the first quarter of 2015, with total market capitalisation rising about 1.3% in nominal terms to MXN7.1trn. Even so, given political uncertainties in Brazil, Mexico was the most active equity market in Latin America, accounting for around 40% of Latin America’s total trading volume.

This chapter includes an interview with Jaime Ruiz Sacristan, President, Bolsa Mexicana de Valores (BMV).

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Although the pace of expansion has moderated in the past two years, in line with a sluggish economy, Mexico’s insurance industry has been experiencing strong growth. The number of active companies in the sector reached 105 by the end of 2014, up significantly from 70 in 2000. Moreover, total premium income in 2014 reached $24.47bn, or 2.1% of GDP, according to the industry’s main regulatory body, the Insurance and Surety National Commission, while premium income grew by 4.5%, or about 1% in real terms. Meanwhile, the introduction in 2015 of the solvency II capital reserve, governance and transparency standards placed Mexico in the vanguard of insurance industry regulation. With insurance penetration rates still relatively low, the outlook for the sector remains encouraging.

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With more than 6% of GDP coming from oil and gas, and 1.8% from the utilities sector, energy is one of the most important components of the Mexican economy. The country’s oil exports have made up a large part of the public budget for several decades. Nonetheless, the decline in production of Petróleos Mexicanos (Pemex), the state-owned oil company, from a peak of roughly 3.4m barrels per day (bpd) to around 2.5m bpd after 2010, combined with oil price volatility, led to a legislative revision in 2013. The energy reform, which opened up the sector to private investment, is expected to have a profound impact on the sector, though in an initial phase, investment in oil and gas exploration and production is likely to be outrun by advancements downstream. Even so, following reform, Mexico is poised to become one of the most dynamic energy markets in the region.

This chapter includes interviews with Pedro Joaquín Coldwell, Minister of Energy; Emilio Lozoya Austin, CEO, Petróleos Mexicanos (Pemex); and Alberto de la Fuente, Managing Director, Shell Mexico.

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Industry & Mining

Since the early years of the maquiladora concept, a cross-border manufacturing government programme, the Mexican manufacturing sector has evolved significantly. Today, the well-established and globalised Mexican industrial sector is a much more specialised and nuanced market, with a stronger regulatory framework. In 2014 the sector saw its GDP increase by 4.22%, according to the National Council of the Maquiladora Industry, with clothing, paper, transport equipment, and machinery and equipment among the best performing sub-sectors. Meanwhile, contributing around 5% to the country’s total GDP in 2013, Mexico’s mining sector is among the top 10 world producers for at least 16 minerals. Though challenges remain, including stagnant local consumption, with a stronger regulatory framework the country is set to strengthen its position as a global player in manufacturing clusters, ranging from the well-established automotive industry to the rapidly developing aerospace manufacturing sector.

This chapter includes interviews with Manuel Herrera Vega, President, Concamin.

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Telecoms & IT

With the initial signs of effective reform now reaching the market, Mexico’s telecommunications and IT sector is seeing the competitive progress that had eluded it for several years. Although long-time dominant player América Móvil remains the undisputed industry leader, the asymmetric laws introduced by the government are slowly opening the market to more effective competition. This is galvanising market players and reducing prices for consumers, as well as spurring interest among foreign investors. Prices for mobile telecoms fell by 17% between February 2013 and January 2015, according to the Federal Institute for Telecommunications, while prices for global telecoms services fell 15% over the same period. However, market shares for América Móvil have remained fairly steady, particularly in mobile, a trend expected to change in 2016 once competitors are granted access to América Móvil’s wholesale services and infrastructure to complement their own facilities.

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A significant component of the Mexican economy, the transport sector accounted for 6.4% of the country’s GDP and 5.3% of national employment in 2014, according to the Mexican Chamber for the Construction Industry. The country’s significant expansion of manufacturing in recent years is both benefitting the transport sector and placing it under increased pressure. Against this background, the current administration introduced a wide-ranging national infrastructure programme for 2014-18, allocating $39.2bn for the improvement of transportation links. Though declining oil prices since mid-2014 have negatively impacted the country’s budgetary position, leading the government to cut expenditure, no major cuts to large-scale transport infrastructure have taken place, aside from a small number of railway projects. Nonetheless, the current fiscal context may well lead to delays in project execution and will require the government to use the country’s evolving public-private partnership model to seek out increased private sector participation.

This chapter features an interview with Norman Foster, Chairman and Founder, Foster + Partners.

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Construction & Real Estate

As the recent constitutional reforms start to have an impact on the Mexican economy, construction activity is poised to grow. Total investment in the construction sector reached $148bn in 2014, according to the Mexican Chamber of Construction, of which 75% was accounted for by private investment. Though construction continues to be a volatile activity, the sector remains a key component of the Mexican economy, accounting for 8.1% of GDP in 2014. Meanwhile, a growing population and urban development in key cities across the country has put housing development at the forefront of government policy. The 2013 housing crisis, which saw the collapse of three of the biggest homebuilders in Mexico, has seen the government rethink subsidy allocation and other incentives, a move set to help revive the housing sector and reduce the country’s housing deficit, currently estimated at 15.3m homes.

This chapter features an interview with Fernando González Olivieri, CEO, Cemex.

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Research & Innovation

With a more robust government strategy to support research initiatives and a private sector attuned to the benefits of investing in new product development, innovation is slowly becoming instrumental to Mexico’s economic growth. Since taking office in December 2012, the government of President Enrique Peña Nieto has taken steps to improve the environment for research and innovation in the country. Among the recent measures introduced was the establishment of a high-level advisory committee to support the science and research sector, and the creation of a National Entrepreneur’s Institute to improve the environment for business creation. With the government aiming to increase expenditure on research and experimental development from 0.4% of GDP in 2013 to about 1% of GDP by the time the current presidential term ends in 2018, the research and innovation field could be set to enter a new phase of development in Mexico.

This chapter features an interview with Enrique Cabrero, Director-General, National Council of Science and Technology (CONACYT).

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Two straight years of record growth in Mexico’s tourism sector have solidified its importance as a motor for economic growth. Tourism contributes over 8.7% to Mexico’s GDP, employs 3.6m people directly and is the fourth most important source of foreign currency. The sector exceeded growth expectations for 2014, registering a record number of international tourist arrivals, at nearly 29.3m, and generating revenues of nearly $16.2bn, enabling the country to reclaim its spot among the top 10 tourist destinations in the world, according to the UN World Tourism Organisation. The outlook for the industry is particularly positive. Rising demand for accommodation is driving growth in the hotel market and raising investor interest, while government efforts to boost the competitiveness of tourist destinations and increase promotional efforts should see greater diversification of both the tourist offering and source markets in the coming years.

This chapter features an interview with José Luis Castro, CEO, CTS (Corporate Travel Services).

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After a decade of slow growth, averaging 1.3% per year, Mexico’s agriculture sector made a comeback in 2014, outperforming the wider economy and highlighting the sector’s counter-cyclical nature. Buoyed by favourable climatic conditions, the sector ended 2014 posting growth of 2.8%, with total production reaching a value of $53.3bn, according to the National Institute of Statistics and Geography. Meanwhile, total agro-food exports (including agro-industrial goods) reached a record $25.6bn in 2014. While the sector’s performance continues to suffer from a number of structural inefficiencies, particularly in relation to the ongoing prevalence of small farmers and the slow adoption of technology, measures to incentivise production and increase access to financing among small producers should see the sector continue on its path to recovery.

This chapter includes interviews with Ricardo Aguilar Castillo, Under-Secretary of Food and Competitiveness, Ministry of Agriculture, Livestock and Rural Development, Fisheries and Food (SAGARPA) and Javier Valdes, Managing Director, Syngenta Mexico.

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A decade after the introduction of the Popular Health Insurance Scheme, the national insurance programme, Mexico has made tremendous progress toward attaining universal coverage, albeit limited. The country is now striving to guarantee universal access to health care, not an easy feat for a fragmented system suffering from decades of under-spending. While the sector reform announced by the government in 2013 has taken a backseat in the context of fiscal constraints, steps to increase integration among public institutions and between the public and private sectors continue, as part of a countrywide effort to increase efficiency and curb rising costs. As a result, greater cooperation among public institutions and between the public and private sectors should be expected in the coming years. Meanwhile, as standards of living improve, driving demand for health care services, Mexico will remain a key market in Latin America, providing opportunities for drug and device manufacturers.

This chapter includes interviews with Jose Antonio Gonzalez Anaya, Managing Director, Mexican Social Security Institute (Instituto Mexicano del Seguro Social, IMSS) and Sandra Sánchez y Oldenhage, Director-General, PROBIOMED.

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Despite the pressure Mexico’s demographic boom has placed on its education system, the sector has made notable progress in the past decade, with coverage, especially in primary education, having increased considerably. The system is now faced with the substantial challenge of raising the overall quality of education and increasing coverage at the post-secondary and tertiary levels, while reducing high drop-out rates. Recognising the strategic importance of education in raising Mexico’s economic competitiveness, the government passed an important structural reform in 2013 aimed at improving the quality and increasing the efficiency of the system. In 2015, nearly two years after the reform passed, progress is visible, but resistance from Mexico’s powerful teachers’ unions has resulted in a less-than-smooth implementation of changes. Following through with the reform, despite the opposition of the unions, will prove key to breaking the decades-long status quo and ensuring long-term quality and efficiency improvements for the sector

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This chapter provides an overview of Mexico’s tax regime, covering areas of particular interest to investors such as individual and corporate income tax, dividend taxation, foreign operations, tax audits and other investor considerations.

This chapter includes an interview with Carlos Méndez, Territory Senior Partner at PwC México.

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Legal Framework

This chapter provides an overview of Mexico’s legal framework, covering a range of topics from the recent financial and energy reforms to pension funds. In addition, it features a viewpoint by Juan José Lopez de Silanes, Partner, Basham, Ringe y Correa on the energy reform.

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This chapter contains information on hotels, government agencies and other listings, as well as useful tips for visitors on a range of topics such as visa requirements, currency and transportation.

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