Mexico

A short-term path to recovery, medium-term challenges persist

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MEDIUM RISK for enterprise

Economic risk
Business environment risk
Political risk
Commercial risk
Financing risk

Economic risk
Business environment risk
Political risk
Commercial risk
Financing risk

Updated in July 2021.

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GDP	USD1076.16bn (World ranking 15, World Bank 2020)
Population	128.93mn (World ranking 10, World Bank 2020)
Form of state	Federal Republic
Head of government	Andrés Manuel Lopez Obrador (President)
Next elections	2024, General Election

Sound macro-policy framework: fiscal spending is capped and pro-active inflation-targeting central bank
Moderate debt ratios and strong external position (manageable current account deficit, large FX reserves)
Strong legacy from pro-business reforms in the last decade
Structural business environment exceeds Latin American average
Durable political framework with stable handovers of power
Member of OECD
Easy access to capital markets
Support from IFIs likely if needed

Financial integration means market volatility is driven by both domestic (more or less pro-business stance) and external (US) policy risk. Trade uncertainty dissipated but doubts over the implementation of NAFTA remain
Fiscal position highly sensitive to oil price (oil = 30% of public revenues)
Sensitive to US business cycle (around 80% of exports)
Skewed income distribution (geographically as well as among socio-economic groups), still high poverty levels
Security issues related to drug-trafficking
Rule of Law and control of corruption below Latin America’s average

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The pandemic exacerbated pre-existing economic pressures, but activity is set to recover in the short-term

Mexico has a track-record of prudent macroeconomic and fiscal policies underpinning a certain degree of macroeconomic stability. Its inflation-targeting strategy, flexible exchange rate and track record of commitment to fiscal discipline have favoured private investor sentiment in the country. In addition, the Mexican economy has proven to be somewhat resilient in a context of uncertainty linked to the prior US administration’s trade policy and the 2018 electoral context, with stable growth averaging +2.3% over 2016-2018.

However, recent policy measures have weighed on private sector confidence and the pandemic exacerbated an already fragile economic outlook. Relationships with the private sector have been strained, especially in the context of measures aiming to enlarge the role of the national oil and electricity companies PEMEX and Comision Federal de Electricidad (CFE) in their respective sectors. The economic impact of the pandemic, the small scale of the government’s stimulus package and lower demand for Mexico’s key exports led to a sharp contraction of real GDP by -8.5% in 2020 after a milder recession in 2019 with -0.1% growth.

The short-term outlook is positive but the medium-term growth prospects will remain challenging. We expect growth to rebound to +5.1% in 2021 and +4.2% in 2022 as the US stimulus will support demand for Mexico’s key exports and the gradual easing of restrictions as more of the population is vaccinated will boost private consumption. The small scale of the government’s stimulus package could weigh on household incomes and companies’ balance sheets, which could generate economic vulnerabilities in the medium term. We expect Mexico to come back to pre-pandemic GDP levels at least over a three-year horizon.

Still solid macroeconomic and fiscal fundamentals, competitive yet deteriorating business environment

Mexico’s external profile remains relatively robust. The country has a track record of modest current account deficits and of adjusting to absorb external shocks as it did in 2020, reaching a surplus at 2.5% of GDP from a mild deficit of 0.3% in 2019. We expect it will return to a moderate deficit in 2021 at 1.5% of GDP and then a surplus in 2022 at 0.2%. Mexico’s current account deficits are usually largely covered by FDI inflows and the country benefits from easy access to capital markets, as well as a Flexible Credit Line from the IMF. FX reserves increased in 2020 due to high remittances and continued FDI flows (2% of GDP) in a context of a current account surplus.

Mexico’s monetary policy has been cautious and restrictive, pursuing three goals: (i) anchoring inflation expectations so they converge towards the 3% target, (ii) aligning with the Fed’s tightening momentum and (iii) smoothing effects on the currency. During the Covid-19 crisis, Banxico eased rates from 7.25% to 4.0% but started to tighten monetary policy by increasing the rates by 250bps and we expect further hikes.

We expect Mexico to maintain its track record of fiscal prudence. The country has a history of moderate fiscal deficits, which widened only moderately to 4.6% of GDP from 1.6% in 2019 as the government’s fiscal stimulus was small in size. As a result, public debt levels were declining slightly prior to the pandemic before increasing to 60.6% of GDP in 2020 from 53.3% in 2019. We expect that moderate fiscal deficits and a mild recovery will allow public debt to stabilise at its current level in 2022.

Mexico’s structural business environment is the second best in the Latin American region, with the country losing its first place to Chile last year, according to the 2020 World Bank Doing Business Survey. It ranks 60th worldwide out of 190 countries (down from 54th in 2018). However, key shortcomings remain in its World Governance Indicators, specifically the areas of rule of law (152nd) and control of corruption (170th). Successive administrations have also failed to curb the escalating corruption and crime that stifle economic and social outcomes.

Political risk is moderate. The ruling coalition won a comfortable election in the Lower House of Congress while opposition parties stripped the party from its supermajority in the Lower House. This will not hamper the ruling party’s ability to implement reforms but will allow for greater checks on policies for constitutional amendments.

Trade structure by destination/origin

(% of total, 2020)

Exports	Rank	Imports
United States 79.1%	1	43.9% United States
Canada 2.6%	2	19.2% China
China 1.9%	3	3.8% Korea, Republic of
Germany 1.5%	4	3.6% Japan
Taiwan 1.1%	5	3.6% Germany

Trade structure by product

(% of total, 2020)

Exports	Rank	Imports
Road vehicles 23.3%	1	14.6% Electrical machinery, apparatus and appliances, n.e.s.
Electrical machinery, apparatus and appliances, n.e.s. 10.7%	2	7.9% Road vehicles
Office machines and automatic data processing machines 8.1%	3	6.0% Other industrial machinery and parts
Telecommunication and sound recording apparatus 6.9%	4	5.4% Office machines and automatic data processing machines
Other industrial machinery and parts 4.8%	5	5.1% Telecommunication and sound recording apparatus

The law provides no framework on standard payment terms, but it is common to rely on 30 days credit starting from the date of the invoice. In practice, payments take place wihtin 40 to 50 days on average, whilst delays of 15 to 30 days may be expected.

Low
Medium
Sensitive
High

Payments
Court proceedings
Insolvency proceedings

Payments
Court proceedings
Insolvency proceedings

The court system is complicated by its federal structure and it is known for a lack of transparency and independence. Business disputes are not dealt with by specialized judges and in practice the fast track mechanisms which could facilitate proceedings when the claim is straightforward cannot be relied upon. Overall, procedural delays and costs are significant and pre-legal action remains the most efficient means of collecting debt.

The debt restructuration process is not efficient at all, and proceedings may last for years (ex. Mexicana). As a result, liquidation is in practice the default procedure when the debtor becomes insolvent and the chances of collect debt through this channel are very low.