Mexico: emerging market, opportunities for new investments

March 2017  |  SPECIAL REPORT: EMERGING MARKETS – OPPORTUNITIES AND RISK MANAGEMENT

Financier Worldwide Magazine

March 2017 Issue

March 2017 Issue


Mexico has become a very attractive emerging market for foreign investors. It is Latin America’s second largest economy with a $1.26 trillion GDP, placing it as the 13th largest in the world. In terms of purchasing power parity, Mexico ranks 11th worldwide, and in terms of exports is the 12th largest worldwide.

Mexico’s automotive industry has boomed in recent decades, becoming the fourth largest auto exporter. It recently surpassed Japan as the second-largest US auto parts exporter. Some of the world’s largest automotive companies, such as Volkswagen, Toyota, Daimler, General Motors, Nissan and BMW have decided to maintain or increase their production in Mexico recently, or have announced their intention to do so, regardless of the external factors surrounding the US market.

The country has signed 32 Reciprocal Promotion and Protection of Investments Agreements with 33 countries, 10 free trade agreements spanning 45 countries, nine partial scope and economic complementation agreements within the framework of the Latin-American Integration Association (ALADI), and is a member of the Trans-Pacific Partnership Agreement (TPP).

Furthermore, Mexico actively participates in multilateral and regional organisations and forums like the World Trade Organisation (WTO), Asia-Pacific Economic Cooperation (APEC), the Organisation for Economic Cooperation and Development (OECD) and the Latin American Integration Association (ALADI).

Given that the Mexican government has signed trade agreements in three continents, the country has become a platform from which a potential market of over a billion consumers, accounting for 60 percent of the world’s GDP, can be accessed.

By using the most recent data from a number of specialised international agencies and publications, we briefly analysed the opportunities that Mexico has to offer for the coming years as an emerging market.

The International Monetary Fund (IMF) projected a slightly higher growth of 2.3 percent for Mexico in 2017, and the country is expected to experience growth of 2.9 percent in the medium term. The agency is optimistic with respect to the coming months, justifying the projection in a recovery of the emerging market economies.

The OECD shares the same opinion, and estimates that Mexico’s GDP will reach 3 percent this year. The OECD’s economic outlook document also indicates that “the depreciation of the Mexican peso has strengthened Mexican exportations and the resilience of the internal demand continues to support the economic activity”.

Moreover, the ‘Doing Business in Mexico 2016’ report analyses why, despite the global economic slowdown, the predictions for the country are moderate and not pessimistic, and concluded that “the gradual recovery of United States, helped to buffer the negative effects of the major falls in prices of raw materials and the high volatility of the global financial markets”.

At the end of 2016, the International Trade Administration (ITA) published a report on the main technology markets in the manufacturing industry, which emphasises that Mexico has been a key destination for US manufacturing exports since 2011, and it should remain as such for the coming years, provided that no unreasonable trade barriers are imposed on the imminent negotiation of NAFTA.

Additionally, the ITA estimates that exports will increase in 2017, mostly because of the dynamism registered in the automotive industry. It is worth mentioning that US external sales are highly dependent on the Mexican manufacturing activity. For this reason, any decision on trade and tariff matters by the US government may have a rebound effect on its own economy.

The ITA also recently affirmed that “the growing presence of the automotive industry in Mexico is a key factor for the increase of the US manufacturing exportations”. The forecasted growth for the automotive industry by 2020 is that production will rise to up to 5 million vehicles, in comparison with 3.4 million that have been produced in previous years.

The set of structural reforms approved by the Mexican Congress between 2012 and 2014 have also been key to the development and improvement of productivity and competitiveness in the economy. Reforms in areas including telecommunications, economic competition, financial services and labour markets have provided legal certainty which has increased foreign investment in Mexico.

Additionally, in 2016 the general rules for the national anti-corruption system were approved. The amendment involves three main pillars to fight corruption. First, the chief audit office of Mexico, which oversees revenues and expenditures of the federal government, expanded its scope to oversee local institutions and investigate expenditures in recent years. Second, the public administration secretariat, which is responsible for monitoring and, where appropriate, punishing public officials involved in corruption issues, will now expand its reach and sanctions and, under the new scheme, the head of the agency has to be ratified by the senate. And third, the office of a new and autonomous anti-corruption prosecutor has been created, which will be responsible for prosecuting individuals. This new agency will be part of the new attorney general’s office that will be autonomous in 2017.

Opportunities for new investment

Mexico is a key player in emerging markets for IT. Gartner recently published an analysis and some predictions related to the aggressive restructuring of IT matters in Mexico. They affirm that the structural reforms driven by the federal government are resulting in strong demands for IT infrastructure, creating more opportunities for suppliers of technology and IT services. This reflects the increasing importance of the region in the world economy and in the IT industry, where Mexico and Brazil are key players within the emerging markets, as they keep attracting the attention of leading global IT providers.

There are important facts to highlight from this analysis. First, the federal government has driven a series of structural amendments in order to modernise and become more competitive in different economic sectors, including technology infrastructure. Furthermore, IT infrastructure projects, such as the construction of data centres, are key for modernisation efforts, providing opportunities in the construction of new facilities including investment in hardware and software. Additionally, the growth of the retail industry is a reflection of economic progress and the expansion of the middle class, which has led to the proliferation of technologies designated to modernise a sector previously considered highly fragmented and outdated.

Mexico, according to Gartner, is expected to see regional growth in the dynamic servers markets in 2017. Furthermore, the country will become a Latin American powerhouse in data centre services. Also, in 2018, retailers in Mexico will double their actual investment in CRM, ERP, supply chain management and BI, as a consequence of a fast growing retail market.

Aerospace industry

Boeing estimates that by 2033 the global aerospace industry will have more than 36,000 aircraft with over 100 seats. A recent publication by ProMexico explained that exportation of aerospace components in Mexico increased by 14.1 percent annually from 2006 to 2015.

Exports from the Mexican aerospace industry reached almost $7.5bn in 2016, according to Mexico’s Aerospace Summit. The strategic programme of the aerospace industry for 2010-2020, coordinated by the Ministry of Economics, estimates that the industry will see $12.2bn worth of exports by 2021, with an annual growth of 14 percent.

This year and until 2020, the Mexican aerospace sector will likely become the 10th largest worldwide in terms of sales, surpassing Brazil and Spain. It is currently 15th. This will potentially create 110,000 jobs, of which nearly 35 percent are expected to be higher-level positions in the engineering field. The industry also expects to reach exportation targets above $12bn.

The Mexican economy is strongly prepared to continue growing despite external challenges. Mexico has the capacity to offer attractive opportunities for foreign investors and new ventures. Additionally, Mexico is characterised by its wide variety of natural resources, its highly qualified workforce and its geographical advantage with respect to other countries. The country is also in close proximity to some of the world’s biggest consumption centres, which allows companies to respond easily to growing demands. It is clear that Mexico offers interesting investment opportunities for the coming years.

 

Hugo Cuesta is a managing partner and Luis Cardier is an associate at Cuesta Campos y Asociados. Mr Cuesta can be contacted on +52 33 3630 0580 or by email: hcuesta@cuestacampos.com. Mr Cardier can be contacted on +52 33 3630 0580 or by email: lcardier@cuestacampos.com.

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