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MEXICO. Driving the Americas forward

Article - November 2, 2012
During the tequila crisis, Mexico suffered some arduous times. Economically, the country is now back on its feet and last year its exports reached US$300 billion, higher than any other Latin American country
Mexico has come a long way since the days of the tequila crisis and the devaluation of the Peso in 1995. After a US$50 billion bailout and almost two decades of strategic planning and action to recover the economy, Mexico is moving back into the limelight for positive reasons.

Mexican banks’ smooth navigation of the financial crisis owes much to a favourable economic environment and to conservatism in their own lending. Luis Téllez, CEO of the Mexican Stock Exchange says that “the Mexican financial system is very solid and the banking system is well capitalised.”

Furthermore, after spending much of the past decade in Brazil’s shadow, last year it outpaced its great Latin American rival; this year GDP is expected to grow nearly twice as fast, at about 4 per cent.

Despite buoyant growth in a middle-income country of 115 million people, Mexican banks have also been helped by their own caution. Only a third of all Mexican firms have access to commercial bank loans; among small firms, the proportion is lower still. Many businesspeople complain that Mexico’s banks have been playing things too safe.

“Mexico’s real strength is that it is the country with broadest number of FTAs worldwide. That makes Mexico a very attractive partner for many countries worldwide, especially for the European Union, US and others.”

Dr Edmund Duckwitz, German Ambassador to Mexico

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“Today Mexico has an economy of more than US$1.15 trillion.  Investing in Mexico is easy, the workforce is young, skilled and the costs are very competitive.”

Jorge Arce,
General Director of
Deutsche Bank in Mexico
On the other hand, the General Director of Deutsche Bank in Mexico, Jorge Arce, says that this cautious approach was necessary and that Mexico will reap the rewards in the long term.

“The government by law has followed a disciplined fiscal policy by issuing strict limits on their spending, even in the amount and profile of its debt. Our debt divided by GDP is about 24 per cent or less (Brazil’s is above 50 per cent). We have reserves of over US$150 billion, many countries, developed or developing, would dream of having this,” he says.

The country’s changing fortunes are also partly due to slowing growth in China, a big buyer of Brazilian commodities and bitter rival of Mexican manufacturers. Thanks to higher Chinese wages and the rising cost of shipping across the Pacific, Mexico is increasingly attractive to foreign investors.

Mr Arce notes that the emergence of the Chinese was hard on Mexico, but the country is now prospering and profiting from changes in labour costs.

“Mexico was hit hard by China’s global trade. Our workmanship for a while could not compete with Chinese cost, but that difference is over; now our cost per unit of labour is more competitive than China. Mexico also offers easy and close access to large markets, high productivity from its workforce and a large and thriving domestic market. For example, today we are the fourth largest producers of cars in the world. Our trade and economic openness has benefited ourselves and our partners. Mexico exported US$300 billion last year, more than any other Latin American country, but we import about the same from countries like Japan, Korea, Germany and the US,” he says.

Although the American market is sluggish, Mexico is taking a bigger bite of it. HSBC thinks that by 2018 Mexico will overtake Canada and China to become America’s main source of imports. Since the implementation of the North American Free Trade Agreement (NAFTA) in 1994, Mexico’s share of US imports has increased from 7 per cent to 12 per cent, and its share of Canadian imports has doubled to 5 per cent.

Mexico’s GDP plunged 6.2 per cent in 2009 as world demand for exports dropped, asset prices tumbled, and remittances and investment declined. However, GDP posted positive growth of 5.4 per cent in 2010 and 3.8 per cent in 2011, with exports – particularly to the US – leading the way.

The German Ambassador to Mexico, Dr Edmund Duckwitz, agrees that Mexico has great prospects, but encourages investment and trade on a more international scale to exploit further growth opportunities.

“I think that Mexico should be a little bit more aggressive when it comes to presenting itself internationally. Perhaps it’s a problem for Mexico that 80 per cent of its trade relations are with the US. I think Mexico should see much more of the opportunities that can be offered by the European market, for instance,” he says.

Guillermo Babatz, President of the National Banking and Securities Commission agrees, saying, “Mexico needs to have more companies from different sectors to take advantage of the good moment the market is going through.”

The German Ambassador also states that Mexico is taking steps to redress this imbalance, acknowledging that the country is very appealing for foreign investors and has free trade agreements (FTAs) with more than 50 countries including Guatemala, Honduras, El Salvador, the European Free Trade Area and Japan.

“Mexico’s real strength is that it is the country with broadest number of FTAs worldwide. That makes Mexico a very attractive partner for many countries worldwide, especially for the European Union, US and others,” he continues.

Mexico possesses lots of advantages for potential investors. Recent administrations have expanded competition in seaports, railroads, telecommunications, electricity generation, natural gas distribution and airports.This improvement in infrastructure has allowed Mexico to become so appealing for investors. The country has solid foundations and investors realise this and will seek to capitalise on it. Conversely, the need for infrastructure improvement is still evident in the country.

Dr Francisco Gonzalez Diaz, the Mexican Ambassador to Germany talks about the importance of developing the country.

“Building creates jobs and constructing roads allows us to ship goods and people easier,” he says. “The recently opened Baluarte Bicentennial Bridge, which is in Durango, is the highest and longest bridge in the world. It was designed using Mexican technology and built by Mexicans, but we would welcome more participation from Germany on this. These projects are vital to us on a number of levels.”

Tourism is also a market with vast potential in Mexico. According to the General Director of Lufthansa in Mexico and Central America, Wolfgang Will, the aviation sector reacts to the economy of a country.

“Air traffic is a communication medium that connects business people, as well as people who have an interest in travelling for private reasons, and this is reflected in the demand. When an area of the economy tends to improve then the aviation industry feels the same,” he says.

Education is also vital for economic growth and prosperity in a country. Dr Duckwitz believes that this process goes beyond just teaching the youth of a country. “Education is vital, not only in schools and universities, but professional training as well,” says the German Ambassador. “We have started collaborating in the field of professional training and we are trying to stimulate new investments from Germany. There are 1,200 German companies in Mexico and Volkswagen is the biggest: they have 16,000 workers in their factory, making it their second largest in the world.”

After years of turmoil the economic future looks very bright for Mexico. Mr Arce agrees. “Today Mexico has an economy of more than US$1.15 trillion,” says the Deutsch Bank general director. “Investing in Mexico is easy, the workforce is young, skilled and the costs are very competitive. I said to a foreign client who is about to open a factory that the infrastructure is good and the whole country shares the export culture.”  

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