31 March 2016
Mexico: Reform Provides New Impetuses for the Economy
- Well-developed manufacturing sector
- Extensive network of free-trade agreements
- Geographical proximity to the US
- Dependence on US economic performance
- Public security problems
- High poverty rate
Since taking office in 2012, President Enrique Peña Nieto from the Institutional Revolutionary Party (PRI) has acted swiftly on his reform agenda, aiming to address the country’s long term structural weaknesses that have impeded economic efficiency. Peña Nieto introduced initiatives to set limits on the state’s longstanding monopoly on the extraction, production and distribution of oil, gas and electricity by allowing private investments. He reduced the power of the telecommunications giants by opening the door to competition. The fiscal reforms were passed with an objective to boost government revenues by 3% of GDP by 2018.
As the legislative phase of the reforms was completed, the government will focus on the implementation of the reforms, notably by ensuring that the new regulatory institutions could effectively address the lack of competition and underperformance in the reformed sectors. For instance, Mexico's total oil production in 2014 had declined by 27% from its peak in 2004 due to operational inefficiency. Crude oil production was at its lowest level since 1986.
High poverty rate in Mexico represents a major social issue. According to the government data, the rate increased to 46.2% last year from 45.5% in 2012, equivalent to 55 million people in the country. Mexico’s drug-related violence has been another deeply-rooted problem for the country. In combating the threats of drug trafficking and organised crime, Mexico has been closely co-operating with the US, its dominant trade and investment partner. Both countries recognise the mutual benefits of maintaining a close relation, and have pledged to strengthen co-operation on security issues. Relationship with the US will remain the administration’s key foreign policy priority.
Mexico is the second largest economy in Latin America, behind Brazil. It is an export-oriented industrial economy, producing a wide range of goods from automotive, aeronautical and electronic products, to low-end goods like clothing and textiles. It is also a major non-OPEC oil producer. Amid weak domestic demand and lackluster global economic activity, Mexico’s economy has registered annual growth of below 3% since 2013. The central bank has kept its benchmark interest rate at a record low of 3% for more than a year, and the cut in government spending will last into 2016. The Mexico Peso has depreciated by 12% against the US dollar year-to date and by about 20% over the past 12 months.
In September 2014, inflation rate fell to 2.5%, its lowest level on record. Mexico would benefit from the improving US economy, given that the US is the destination of almost 80% of Mexico’s exports. Looking ahead, if the structural reforms are properly implemented, Mexico’s economy could see a higher growth as the benefits gradually materialise by eliminating some bottlenecks, enhancing competition, reducing labor market rigidities and attracting the much-needed private investment, particularly in infrastructure and the energy sector. Given that oil revenue funds about a third of federal spending, diversification of fiscal revenues away from the oil sector would be needed, especially if oil prices remain low for a prolonged period.
Hong Kong-Mexico Trade
Total exports from Hong Kong to Mexico increased by 26.0% from HK$22,846 million in 2013 to HK$28,791 million in 2014. The top three export categories to Mexico were: (1) telecommunications, audio & video equipment (+50.8%), (2) electrical machinery, apparatus & appliances, & parts (+2.9%), and (3) office machines & computers (+46.7%), which represented 79.7% of total exports to Mexico.
ECIC Underwriting Experience
The ECIC imposes no restrictions on covering Mexican buyers. Currently, the insured buyers in Mexico range from small and medium sized companies to listed companies. For 2014, the number and the amount of credit limit applications on Mexico decreased by 13.1% and 43.6% respectively, while insured business increased by 26.9%. Major insured products were electronics, office & stationery supplies, and furniture, which represented 40.4% of ECIC’s insured business on Mexico. The Corporation’s underwriting experience on Mexico has been acceptable, with two payment difficulty and three claim payment cases of moderate amount reported from October 2014 to September 2015, involving clothing, electronics, toys, and camera & optical goods.