Mexico - unleashing a champion of the emerging markets
By Diego Gomez-Pickering, Mexican Ambassador to the UK.
In the past 18 months, the Mexican government has managed to change the narrative with the foreign and domestic media. Although challenges persist, new concepts and phrases such as ‘Aztec tiger’, ‘pact for Mexico’ and ‘structural reforms’ have been incorporated into the storyline.
Fully aware of the importance of handling expectations with caution, such change has been possible thanks to a set of solid economic and political arguments.
As with many emerging market economies (EMEs), Mexico has learned important lessons from the crises of the seventies, eighties and nineties, allowing the country to implement strategies which have enabled it to benefit from a relatively quick recovery from the 2008 crisis.
Additionally, the recently enacted set of reforms currently being discussed in congress, have made Mexico a highlight among EMEs, turning it into one of today’s most attractive places for investors.
While maintaining strong macro-fundamentals and external resilience policies, Mexico is now playing an important role as an EME, committed to a process of reform through the promotion of sustainable economic growth, thereby making the economy more competitive and increasing productivity.
Mexico is a stable democracy with solid institutions which have enabled the country to benefit from sound macro-economic policies for the past 15 years. Today the country is known for its low inflation rate (below 4%), well-controlled levels of public debt (35% GDP), low interest rates, a highly capitalised financial system with a new banking reform aimed at increasing lending and one of the OECD´s lowest unemployment rates (under 5%).
This all adds up to healthy public finances, an autonomous monetary policy, a flexible exchange rate and a robust financial system. As a result, Mexico is currently the 14th largest economy in the world, with a GDP of over $1.2 trillion. Today, Mexico trades $700bn annually in goods and services of which 500bn is with the US ($1m per minute).
Exports more
Mexico exports more than $280bn worth of goods and services to the US each year, which is 2.6 times as much as Brazil, Russia, India and South Africa combined. Since the North American Free Trade Agreement (NAFTA) was signed 20 years ago, Mexico’s economy has turned into one of the most open in the world. Our network of 12 free trade agreements linking us to 44 countries attests to our openness and commitment to expand our export base.
Most recently, Mexico joined Colombia, Chile and Peru in the Pacific Alliance and is currently involved in the Trans-Pacific Partnership (TPP) negotiations. Over the last three decades, Mexico has made the transition from a commodities and agriculture-based economy to one dominated by manufacturing and multiple services. Whereas oil once represented over 75% of Mexico’s exports, today its manufactured goods account for three out of every four export dollars, placing Mexico among the G20´s top three in mid- and high-level technology manufactures.
It is also the natural and strategic destination for expanding global industries, such as domestic appliances, aerospace and automotive. Worldwide, Mexico is the top flat-screen and refrigerator exporter, the fifth exporter of computers and fourth of new vehicles. In fact, Mexico produces more manufactured goods than the rest of Latin America put together.
Nevertheless, Mexico still has to face many challenges in order to unleash its real potential. Since President Enrique Peña Nieto took office in December 2012, the country has begun to undergo a series of structural reforms, known as the Pact for Mexico, through which the main political forces set aside their differences and worked towards a common agenda: political agreement was reached for the promotion of economic growth, social development and income distribution. The most startling and unprecedented package of reforms has been approved in Congress in key sectors, including telecommunications, labour, finance, tax, education, politics and energy.
These changes, along with the consolidation of democratic institutions, are reinforcing Mexico as a relevant and dynamic player in the global economy. They will prove the merits of Mexico as an international player, as a strong and trustworthy partner and will underline its potential for UK investors. Energy is just one of the sectors identified as a leading magnet for potential investment. Beyond its impact in triggering productive capabilities in many other areas, we must not forget the appealing projects detonated by the reform in the telecommunications and infrastructure sectors.
Both energy and telecommunications will offer extremely attractive opportunities and we will witness even more dynamism in the already outstanding areas that link both countries’ economies, including pharmaceutical, manufacturing, aerospace, electronics, food and beverages. In order to apply the reforms and improve the competitive advantages of the economy, the Mexican constitution and several laws have been updated, strengthening Mexico’s legal framework.
President Peña’s administration acknowledges that economic growth is the only sustainable way to improve the quality of life of the population and to tackle the main challenges faced by the country.
Based on this transformative effort, global expectations for Mexico as an emerging market are running high around the world, particularly in Europe and the UK.
It doesn’t come as a surprise that the economist Jim O’Neill, who coined the term BRIC as potential powerhouses of the world economy more than a decade ago, has now coined the acronym ‘MINT’ for Mexico, Indonesia, Nigeria and Turkey – to describe promising emerging economies. He goes further by forecasting that Mexico’s economy could grow at annual rates of 6.95% until 2050, thus ranking as the eighth largest economy in the world, above nations like France or even the UK.
Taking into account their particularly successful track record of mutual understanding and institutional work, Mexico and the UK have established high level dialogue mechanisms for economic and trade issues and have agreed to concentrate more on market share than on quantitative indicators, which means increasing our market share from 0.6 to 1.5%.
We are confident of achieving this goal but both nations must continue to increase the trade flow across the Atlantic to promote reciprocal investment. It is important to bear in mind that energy and telecommunications will present investment opportunities in the medium term, since their full implementation will take time. Meanwhile, the national six-year infrastructure plan already offers relevant opportunities due to its ambitious nature and its demand for high volumes of investment and resources.
President Enrique Pena Nieto recently launched the National Infrastructure Programme for 2014-18, which envisages a total investment in infrastructure of 7.7 trillion pesos, equivalent to £380bn. The sector is considered one of the greatest priorities for public spending in Mexico.
Awakening
This level of investment will enable the necessary technological development, research and investment in a country that nowadays is already producing more than 100,000 graduate engineers per year. This technological awakening will impact upon all other economic and academic sectors including the energy sector where more international attention is focused today: for example, energy reform envisages a domestic human and institutional framework being developed to exploit reserves of deep water oil and shale gas, to allow modern hydroelectric and combined cycle power plants to be built and to facilitate the construction of gas pipelines to distribute natural gas to the country’s main industrial centres.
The investment and reform programme will guarantee better access to health services, and it will encourage regional development. There are also many ongoing rail projects which will improve the transport of goods within Mexico, in addition to telecommunications projects which will consolidate Mexico’s position as a country with widespread access to high speed internet, giving better telephone, television and radio services, supported by modern satellites.
Although six of every 10 pesos invested will be financed from federal or state budgets, the private sector is also expected to play a key role in extending and upgrading Mexico’s infrastructure under a recently implemented law on public-private partnerships.
According to Mexico’s Finance Minister, Luis Videgaray, the infrastructure plan will add between 1.8 and 2% points to Mexico’s annual GDP growth rates by 2018, and, in conjunction with the structural reforms approved last year, will create around 350,000 additional jobs in the formal sector every year.
In a nutshell, in addition to having its macro fundamentals in good order and benefiting from a strong external position, Mexico is implementing a plan to fully unleash its potential as a champion emerging market. The United Kingdom is well aware of this and is taking the required steps in order to benefit from Mexico’s outstanding and positive investment landscape.