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Post on: 8 Июнь, 2015 No Comment

Business Climate Rating 1

Risk Assessment 2

Recovery in 2014

Following a sharp slowdown in 2013, activity has recovered as of the second quarter 2014 and this should continue in 2015. This to a large extent will depend on the recovery in the US economy, which feeds directly into the Mexican manufacturing industry (36% of GDP) through exports. Despite fairly relaxed monetary policy, with a policy interest rate of 3%, inflation at almost 4%, and an increase in remittances from Mexican workers in the United States, in particular in the construction and hotel and catering sectors, private sector consumption and investment are only picking up slowly, at least initially. After a downturn in 2013, construction (6% of GDP) is gradually feeling the benefits of the public sector investments included in the 2014-2018 national infrastructure plan which covers energy, tourism, health, infrastructure, social housing and urban renewal. Thanks to the opening up of the energy sector, private foreign investment should increase as of 2015.

Public accounts are dependent on oil and gas revenues

Tax revenues account for only 19% of GDP. Over a third comes from levies on the earnings of the national oil operator, PEMEX. Reforms aimed at liberalising the labour market were adopted with the start of the Presidency of Enrique Pea Nieto in December 2012. These are aimed in particular at encouraging companies to declare their employees and pay the associated charges. With the informal economy representing over one third of economic activity and covering half of the labour force, this is a major challenge. Recent tax reforms have imposed a tax of 10% on capital gains and dividends, with the top rate of income tax rising from 30% to 35%, a reduction in the tax advantages enjoyed by the border provinces in the north and, lastly, tax on high calorie foods and sweetened drinks. The amount generated by these measures will still be modest: 3% of GDP in 2018. The lessening of the reliance on oil and gas revenues is linked with the reform of the energy sector, which has just been approved. The energy sector, from production to distribution, has been nationalised since 1938. The Government, without calling into question public ownership, is looking to involve (foreign) private sector companies in its development in order to help boost production and locate reserves which have been in constant decline and thus be able to reduce the levy (60%) on the revenues of PEMEX. This reform will take the form of operating licences and contracts to share profits and output. The slight increase in the public deficit associated with higher public expenditure will not lead to any significant rise in debt, so far under control and mainly domestic. Budget policy is likely to remain cautious especially as the government is committed to reducing the deficit by 0.5% of GDP each year down to 2% in order to reduce the burden on PEMEX.

Serious dependence on United States

There is a small deficit in the balance of trade. Of the countrys exports, 78% go to the United States and of these 75% are manufactured goods and 22% raw materials (oil 16%, gold and silver 4%). Half of the manufactured exports are of assembled components imported into the maquiladoras located in the north of the country. The automobile industry (5% of GDP, 15% of industrial output and 20% of exports) is a perfect illustration. Next come food products (7% of sales), followed by electronic and electrical goods, including telephony and household white goods. The trade in services runs a deficit of 1% of GDP, with revenues from tourism from the United States only covering half of the cost of freight and insurance arising from the trade in goods. The revenue deficit (2.3%) is being reduced as and when income is repatriated with the increase in Mexican investments and companies in other countries. It is almost offset by remittances from Mexicans living in the United States. Foreign inward investment, twice as high as Mexican investment abroad, helps to cover the low level current account deficit and build reserves. The 73 billion dollar precautionary credit line made available by the IMF also acts as an additional buffer.

Major reform package but with unknown effectiveness

Without a majority in Congress, President Nieto and the Partido Revolucionario Institucional (PRI — centre) jointly launched with the opposition parties, the Partido dAccin Nacional (PAN), and the Partido de la Revolucin Democrtica (PRD), a major reform programme entitled Pacto por Mexico. The aim is to eliminate the structural malfunctions that are holding up growth (an average of 2% between 2001 and 2013). Following its initial successes (labour market, telecommunications, education, tax and credit), Pea Nieto has recently come up against contradictory political agendas. The PAN, on the right, will support energy reform in exchange for a reform to electoral law and party finance, aimed at helping the formation of majorities and reducing corruption. The PRD, on the left, refused to support the opening of the energy market to private companies and withdrew from the pact. Disagreements are now even appearing within the PRI, where the reforms risk upsetting long-held benefits accrued during long decades in power (1929 — 2000). The scale of the initial reforms, and thus their potential impacts, are already looking limited. The biggest challenge lies in the reform of the energy sector. A great deal will depend on how the legislation is applied by the regulator and courts, the attitudes of the unions, developments in the security situation in the northeast where large shale gas reserves have been found and the outcome of the legislative elections of July 2015.