The Report: Mexico 2017

Economy

From being relatively closed and heavily dependent on oil exports to drive growth and accrue foreign currency, Mexico has progressively liberalised and integrated into regional and global value chains. Although economic openness left Mexico more exposed to the global financial crisis than some of its Latin American peers, its economic profile has since allowed it to bounce back as global trade and investment flows recover. Uncertainty is likely to constrain investment in 2017, at least until there is clarity as to the impact of changes in US trade and investment policy. Once the short-term turbulence has been negotiated, a modest acceleration in growth is likely, while continued fiscal and monetary policy vigilance should see debt sustainability assured and inflation pressures contained. This chapter includes interviews with Ildefonso Guajardo Villarreal, Minister of Economy; Paulo Carreño King, Director-General, ProMéxico; and Valentín Díez Morodo, President, Mexican Business Council for Foreign Trade.

Banking

For more than two decades Mexico’s banking sector has been characterised by sound regulation, high capital adequacy ratios and strong profitability. Having learned from previous experiences, the Mexican banking sector emerged relatively unscathed from the 2008 global financial crisis. Since then, lending growth and profitability have picked up, despite a relatively sluggish economy, as has the sector’s share of the economy, with assets as percentage of GDP standing at 41.4% at the end of 2016. With interest rates climbing higher, consumer confidence weakening and macroeconomic uncertainty prevailing, credit growth in Mexico is likely to continue to moderate through 2017, with market observers viewing mortgage lending as being particularly sensitive to the interest rate cycle. Over the longer term, the authorities’ efforts to boost financial inclusion across the country will be crucial to the development of the sector, as well as to socio-economic advances more generally. This chapter features an interview with Agustín Carstens, Governor, Banco de México.

Capital Markets

Mexico’s capital markets are tightly regulated, but this has not greatly hampered innovation, with a number of new financial products becoming available to investors in recent years. The sovereign bond market has been particularly well developed over the past two decades, while corporate bond issuances have also been increasing, particularly among leading parastatal companies, such as the state-owned energy giant Petróleos Mexicanos and the Federal Electricity Commission, as well blue-chip private firms. In light of external and domestic economic and political uncertainties, as well as rising interest levels, the Mexican equity market is expected to tread water in 2017. With the introduction of two new financial products aimed at stimulating infrastructure investment in 2016, namely FIBRA E and CerPIs, 2017 will prove a litmus test of their capacity to impact Mexico’s capital markets in the way that FIBRAs and CKDs have in recent years. Overall, however, the capital markets are likely to continue to see positive growth in the years ahead. This chapter includes an interview with Carlos Rojo Macedo, CEO, Grupo Financiero Interacciones.

Insurance

Despite challenges, and as the Mexican insurance sector laboured to meet new reporting standards, signs of strength have been showing in terms of profitability and premium growth. As rising costs were passed on to clients due to the weak exchange rate, some segments – notably health – have seen a rise in premiums. It is expected, however, that regulatory reforms will ultimately limit the rising cost burden faced by consumers. A bigger growth opportunity lies in increasing the penetration rate – currently at half the level of leading Latin American countries like Chile – while the eventual ageing of the still relatively young population bodes well for demand for the whole range of products, particularly life insurance and pensions. After a strong performance in 2016, prospects for 2017 look good but are clouded by the uncertain macroeconomic environment. Factors may vary, but what is agreed is that concrete plans are needed in order to boost the overall penetration rate in the country. This chapter contains an interview with Mario Vela Berrondo, President, Mexican Association of Insurance Companies.

Energy

Mexico’s energy sector has been undergoing a profound paradigm shift since a reform programme, launched in 2013, put an end to state monopolies in most subsectors and began the process of opening the production and distribution of oil, gas, petrochemicals and electricity to private investment. In parallel, the entire legal, regulatory and institutional framework is being transformed to oversee new market mechanisms. The fruits of these efforts became more apparent in 2016 when a number of notable developments took place, including two successful long-term electricity supply auctions and a deepwater oil and gas auction for exploration and production in December 2016. A significant challenge going forward will be to ensure that infrastructure is of sufficient quantity and quality for the entire country to benefit from the reform efforts. While the increase in global oil prices and the decline in value of the Mexican peso in the second half of 2016 and into early 2017 will cause further knock-on increases in prices facing consumers of both combustibles and electricity, the same phenomena should give a boost to the energy sector more generally. This chapter includes interviews with José Antonio González Anaya, CEO, Petróleos Mexicanos; Jaime Hernández Martínez, Director-General, Federal Electricity Commission; and Angélica Ruíz Celis, Director-General, Vestas Latin America.

Industry & Mining

In 2016 the Mexican manufacturing sector achieved annual growth of 1.3%, as many other sectors of the economy experienced a slowdown. Accounting for 16.8% of GDP, the manufacturing sector is the largest contributor to the national economy. Given the sector’s economic weight, the November 2016 election of US President Donald Trump has created a shadow of uncertainty over the Mexican economy. However, such is the dependence of US industry on Mexican imports that drastic measures look unlikely. Whether through a refocus on the domestic market or a diversification of export destinations, Mexican industry has preserved the fundamentals on which it can continue to prosper. Additionally, Mexico has long been a global presence in the mining industry, but since 2012 falling commodity prices, coupled with increased royalty payments, have led to stagnation of both production and investment. In early 2017, however, the recovery of metals prices saw a rise in merger and acquisitions in the global mining industry, and a growing belief that a new bull market could be on the horizon. With huge exploration potential, Mexican mining could soon be back after a hiatus. This chapter includes an interview with Alexander W Wehr, President and CEO, BMW Mexico, Latin America and the Caribbean.

Nuevo León

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. 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, and innovation. Reforms at the federal level are already beginning to open up a variety of markets for private sector participation in the energy industry, with some movement becoming visible in gas and electricity generation, especially in the areas of combined cycle and renewables. Additionally, while the state government is making strides towards balancing the fiscal situation, 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. This chapter features interviews with Fernando Turner Dávila, Secretary of Economy and Labour, State of Nuevo León; and Salvador Alva, President, Tecnológico de Monterrey.

San Luis Potosí

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Of all the places vying to be industrial and logistical hubs, San Luis Potosí perhaps lays the best claim to being in the middle of everything. San Luis Potosí is as central as it can be relative to the economic centres of the country. In 2015 the state’s economy expanded by 5.4% compared to 2.6% growth at the national level, putting it in fifth place out of 32 states in terms of GDP growth. Despite unavailable official state figures for 2016, San Luis Potosí is again expected to more than double the nation’s rate of growth, with 2.3% forecast for Mexico and 4.6% for the state. While the uncertainty that has been ushered in with the new US administration may have lowered expectations in the short term, there are several encouraging signs that industrial growth is set to continue apace in the region. Central players in San Luis Potosí’s private sector are, therefore, expecting the region to keep growing for many years. This chapter includes interviews with Juan Manuel Carreras, Governor of San Luis Potosí, Gustavo Puente Orozco, Secretary of Economic Development; and Vicente Rangel Mancilla, CEO, Grupo Valoran, and CEO, Grupo Ranman.

Telecoms & IT

The Mexican telecoms sector is one of the largest and most dynamic in Latin America. The government’s telecoms and broadcasting reforms, introduced through new legislation and a constitutional amendment in June 2013, are widely seen as some of the most successful changes made by the administration of President Peña Nieto. One sign of this is the contribution of the telecoms sector to GDP, which increased to around 3.6% in 2016, up from 2.6% five years earlier. In addition to telecoms, Mexico’s ICT sector has been experiencing strong growth in recent years. ICT exports have accounted for around 10% of Mexican manufacturing exports. In 2014 the value of Mexican ICT exports was $62.4bn, ranking the country as the world’s fifth-largest ICT exporter, behind China, the US, South Korea and Japan. There is clearly major scope to increase technology market penetration in Mexico, particularly by increasing digital management systems across manufacturing industry and services where take-up has so far been limited. The fundamentals of the technology sector point to strong medium and long-term growth.

Research & Innovation

Mexico has long recognised the importance of research and innovation to the development of a strong and sustainable economy. To date, however, the goal of boosting research and development (R&D) spending to 1% of GDP has remained somewhat distant, with public spending across a variety of programmes having an only limited effect on encouraging the development of new technologies and innovative companies. Facing lower budgets in 2017, the government will be more selective in the projects it sponsors and is looking to incentivise further private investment in R&D. Improvements to the intellectual property framework are set to give foreigner investors additional confidence in this area. The target of spending 1% of GDP on R&D by 2018 looks out of reach; nevertheless, the belt-tightening process is likely to have positive effects on the efficiency of public R&D spending in the future. The increased focus on advanced-stage projects and closer monitoring of outcomes should lead to more demonstrable results. This chapter contains an interview with Guillermo Echeverría Miller, CEO, Vuhl.

Transport & Logistics

Mexico’s transport sector has witnessed rapid growth in recent years, although question marks over economic integration with the US – one of the driving forces of transport growth – are introducing a period of relative uncertainty. However, the fundamentals remain positive for the sector, based on demographic growth, rising living standards, a growing middle class, and the expansion of manufacturing and consumer services. In recent years the transport sector has tended to grow at higher rates than the Mexican economy as a whole. Transport GDP grew by 4.3% in 2015, slowing to 2.8% in 2016, while total GDP growth in 2015 was 2.6%, falling to 2.3% in 2016. Most stakeholders in Mexico’s transport and logistics sector recognise that protectionist headwinds in US-Mexican trade could have a negative impact on their industry during the course of 2017. However, fundamentals in the industry are still positive, and there is room to increase efficiency and competitiveness. This chapter features an interview with Andrés Conesa Labastida, CEO, Aeroméxico.

Construction & Real Estate

Mexico’s construction industry is changing gears in 2017. It is the fourth-largest value-added activity in the country and constitutes 8% of GDP. A young, growing population and a rising middle class continue to drive demand for homes, shops, factories and offices. The infrastructure industry is preparing for a future where private sector funding takes over from the public sector and becomes the key engine of growth. Furthermore, profits at Cemex, Mexico’s multinational cement company, have reached record levels, and the project to build Mexico City’s new airport – which is now under way – is the biggest of its kind in Latin America. Furthermore, Mexico’s real estate sector is preparing for a period of moderately increased uncertainty over interest rates, inflation and trade. Despite some apprehension, sales continue and medium-term market fundamentals remain positive. There were 10 real estate investment trusts trading on the Mexican stock exchange in 2016, with a combined capitalisation of some $13.3bn. Some property specialists say worries over inflation and a weaker peso may actually create new investment opportunities, and underline the value of property as a secure, long-term holding. This chapter contains an interview with Jerónimo Gerard Rivero, CEO and Founder, Mexican Retail Properties.

Tourism

Receiving more than 35m international visitors in 2016 – 2.8m more than in 2015 – Mexico continues to move up the world tourism league table. The country’s ranking in terms of arrivals in global tourism destinations improved from 10th to ninth position in 2016, according to the UN World Tourism Organisation. A weak peso has boosted margins for operators and attracted more visitors while at the same time bolstering domestic tourism in Mexico. The famous sun, sea and sand destinations of Cancún, Los Cabos and Puerto Vallarta continue to dominate the international tourism market, and new projects are set to expand capacity of this tried-and-tested model. This chapter includes interviews with Enrique de la Madrid Cordero, Minister of Tourism; and José Carlos Azcárraga Andrade, CEO, Grupo Posadas.

Agriculture

Following 10 years of growth roughly on par with that of the overall economy, Mexico’s agriculture sector outstripped GDP growth by 1.2 percentage points in 2016 and registered a trade surplus for the second year running. Given the uncertainty over future US trade policy, there has rarely been a more urgent or ripe time to address the needs of Mexico’s agriculture industry. In the short term, diversification of export markets and of imports from the US can mitigate the impact of a potential, if unlikely, tariff hike. In the long run, however, the right kind of investment could help unlock agricultural potential. This chapter features interviews with José Calzada Rovirosa, Minister of Agriculture, Livestock, Rural Development, Fisheries and Food; and Gaston Mauvezin, CEO, Proteak.

Health

There is much to be celebrated for the Mexican health care system, which is moving in towards its goal of providing all citizens, regardless of wealth or employment, access to high levels of care. In the last three years, movements to increase coordination between health providers, cut costs and improve services are also to be commended. However, the inherent inefficiencies of the fractured public system and the bureaucratic wastage that accompanies it are a continual obstacle to providing the best possible service. Nevertheless, the private sector already plays a crucial role in the provision of health care in Mexico, which is likely to expand in the future. A great deal will depend on the general elections in 2018, which will determine the direction of a much-needed structural reform to the sector. This chapter includes an interview with Julio Sánchez y Tépoz, Federal Commissioner, Federal Commission for the Protection against Sanitary Risk.

Education

The reform of public education in Mexico has been one of the thorniest political issues that President Peña Nieto has faced. However, as teacher assessment and training schemes gradually become standardised, the constitutional commitment to prioritising learning in schools is advancing a step closer to achieving its goals. Private sector and international support at the tertiary level and in vocational skills training will also be crucial to the development of one of Mexico’s key competitive advantages, its pool of skilled labour, and may help pave the way for greater productivity in the industrial sector. However, in 2017 the government will have to learn to do more with less, as education has not escaped the wide-scale cuts brought about by the country’s economic challenges.

Tax

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 contains an interview with Ricardo González Orta, Partner, Deloitte México.

Legal Framework

This chapter provides an overview of Mexico’s legal framework, covering a range of topics from improvements to the framework for intellectual property and public-private partnerships to regulations and obligations governing value-added tax. In addition, it features a viewpoint by César Maillard Canudas, Managing Partner, Maillard, Cerbón, Canudas, Argumedo, Palma y Asociados, on the labour reform.

The Guide

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 throughout Mexico.