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Mexico: backwater or slough for foreign investors?

Mexico: backwater or slough for foreign investors?

 

 

What countries are suitable for investments? These days the USA, Japan and Europe are financially and economically unstable. That is why more and more investors start looking at Latin America as a suitable place for investment. Such investment gurus as George Soros and Warren Buffer have already invested in the region. Numerous analysts assume that the investment potential of Latin America is considerable and underestimated, with some countries of the region being the frontrunners in terms of economic growth. They say Latin America well may turn into a global economic center. Some Latin American “tigers” are ready to become the “locomotives” of the global economy.

 

 

 

 

 

 
Mexico as an object of investment: statistics
 
According to the Latin American Association of Traders and Investors under Masterforex-V Academy, these are Mexico’s distinctive features as compared to other Latin American countries:
·         It is one of the most economically developed counties in Latin America, in terms of the GDP it comes 2nd after Brazil and has been among the world’s top 15 countries since 2000.
·         Potentially, it is a rich state. Its GDP per capita in 2010 was $13 800. In Latin America it yields only to Chile ($15 000).
·         It comes 11th in the world in terms of population (about 114M).
·         It also comes 14th in the world in terms of territory
·         The USA is one of Mexico’s major outlets.
·         It is a member of the Organization for Economic Cooperation and Development (OECD) and a full member of G-20.
·         Out of all the Latin American countries only Mexico can boast hosting the Olympic Games and 2 FIFA World Cups.
·         The world’s richest person is Carlos Slim Helú, who is a Mexican business magnate. He started his business as a broker. Now he owns an empire of over 200 enterprises – from telecommunication companies to banks and restaurants. Their net capitalization is equal to 5-8% of Mexico’s GDP and 30% of the aggregate capitalization of all the companies registered with the Mexican Stock Exchange.
Pert Yakovlev, a Doctor of Economics, assumes that Mexico is one of the so-called “rising giants”, new global powers. Obviously, the country has a lot to attract foreign investors. In 2010 Mexico was Latin America’s 2nd state (after Brazil) in terms of capital inflow. It received as much as $17.7B of direct investments. In other words, now it is clear why Mexico became one of the so-called MIST states (Mexico, Indonesia, South Korea and Turkey) - a group of developing countries with great economic potential.
According to Probitas Partners, a US-based investment company, it is these countries that constitute the next group of leaders in the emerging markets and are of considerable interest to foreign investors.
 
So what is Mexico for foreign investors? Should they “bet” on Mexico? Let’s try to clarify the situation:
 
Why do investors choose Mexico?

 



 

According to the Latin American Association of traders and Investors under Masterforex-V Academy, Mexico is definitely a country of great opportunities for investors and businessmen. Let’s consider the strong sides of the Mexican economy:
·         Stable growth of general economic indicators. During the global crisis the country’s economy survived even though it suffered big losses. Moreover, in 2010 the country’s GDP showed a 5% increase. This year it is expected to grow by 3.4%.
·         Abundant recourses. Thanks to its mineral resources Mexico is considered a welfare state. It is the 3rd country in the Western hemisphere (and the world’s 7th) in terms of crude oil production. Crude oil used to make about 80% of Mexico’s net export. Now it is 1/3rd. The country’s territory is also rich in silver, gold, lead, zinc, copper, uranium and other recourses. Last year Mexico became the world’s number 1 in terms of silver production, outpacing Peru. By the way, a range of experts say that Mexico’s economic growth is based on the most prolonged increase in the prices on primary products exported from Mexico, especially crude oil. For example, during the pre-crisis period (2002-2007) copper prices increased by 450% while oil prices gained 280%.
·         Economic diversification. The Mexican authorities understand that the country is greatly dependant on the export of raw materials. That is why they strive to diversify the domestic manufacturing industry. For example, the country’s motor industry is well-developed. A lot of well-known US, German, French and Japanese auto brands have their affiliates in Mexico. The country is the world’s 9th biggest automobile manufacturer. Last year the production volume was increased by 50%, with the majority of those autos being exported. Moreover, Mexico is developing its electrical, electronic and radio engineering industries.
·         Innovation technologies. Every year Mexico spends 2% of the national GDP on various research-and-development programs. Mexico has its own space agency and satellites. Now the country’s authorities are planning to build a space launching site.
·         Diversification of external trade and economic ties. As Mexico borders on the USA, it is US-oriented and is treated as a considerable reserve for the US business. It is sufficient to say that Mexico exports 85% of its products to the US. At the same time 75% of the funds invested in Mexico are of US origin. Thanks to the North American Free Trade Agreement (NAFTA) in 1994 the trade turnover between the US, Canada and Mexico trebled. On the one hand, Mexico has a significant competitive edge as it borders on the US (for example, Mexican producers don’t have to spend a lot on transportation, which allows them to make their products relatively cheaper). But on the other hand, Mexico is greatly vulnerable to any shocks in the US economy. That is why the country starts diversifying its external economic ties. By now Mexico has signed multiple free-trade agreements with more than 40 countries of the world, including the US, Canada, Japan, the countries of the eurozone, Asia and Latin America. Very few countries can boast such an achievement. Tax-free trade makes 90% of the country’s net external trade volume.
Mexico has recently boosted its bilateral trade with Asian countries, especially with China. More and more Chinese companies are getting increasingly interested in opening their affiliates in Mexico. Chinese businessmen and investors see Mexico as a perfect US-oriented manufacturing area for their businesses. As a result, thousands of US-oriented assembly rooms (also known as “maquiladoras”) have been founded along the US-Mexican border.
The Latin American integration is deepening. It’s about both MERCOSUR (75% of Latin America’s net GDP) and new unions. For example, in April 2011 the presidents of Mexico, Colombia, Chile and Peru signed the so-called “Pacific Agreement” aimed at increasing their mutual trade by at least $5B.
 
·         Development of small-scale and medium-scale businesses. Mexican small-scale businesses are usually private businesses involved in different kinds of activities – from selling hand-made souvenirs to delivering butylated water. That is why it is wrong to call the Mexicans a lazy nation. This is one of the most hardworking nations in the world (they work for at least 10 hours a day). The government supports the small and mid-scale businesses through subsidies, easy loans etc.
·         Investment attractiveness. In “The World Competitiveness Yearbook 2011” Mexico comes 38th, which is a fairly high standing - among Latin American countries it yields only to Chile (25th). The thing is that Mexico is considered the most favorable place for business in terms of taxation. Investopedia.com offers its list of the top 5 countries with the lowest taxes. Mexico is number 1 in the list. It is followed by Turkey, South Korea, USA and Ireland). Nevertheless, today the Mexican authorities are discussing the possibility of further tax cuts, including a cut in the federal sales tax from 16% down to 13%. Obviously, such measures make the country even more attractive for foreign investors. As for the local housing market, low taxes make it fairly popular among investors, especially when it comes to purchasing fixed property along the Mexican coastline. It is not accidental, that Hilton Worldwide has recently announced its decision to build 12 new hotels on the Mexican seashore.
·         Demographic situation. It should be noted that over the recent decades Mexico has been seeing a real demographic boom. In 1970 the country’s population was roughly equal to 50 million people. In 2000 it was more than 97 million people. Today Mexico’s population is about 114M. Mexico is one of the world’s “youngest” countries: almost 29% of the county’s population is under 14. One of the consequences of the demographic boom is unemployment (5.6%). Low incomes and the lack of jobs force thousands of Mexicans to migrate to the USA (by any means – legally or illegally). In 2010 Mexico became number 1 in terms of migration.
·         Tourism. Mexico’s tourist industry makes 8% of the national GDP. It is the 4th biggest source of foreign currency inflow. Indeed, Mexico is among the world’s 8 most visited countries. Last year over 22 million tourists visited the country. Obviously, 85% of them are from the US or Canada. Tourists come to Mexico not only to visit the local resorts but to get acquainted with the history of the local ancient civilizations.
 
 
The peculiarities of the Mexican mentality

 


 

It is not easy to single out any distinct features of the Mexican national character. No wonder if to consider the fact that this is a “mixed” nation (misceo – mixture) – the descendants of the “white” colonizers and the local Indians, the conquerors and the conquered. Let’s look at some of the national traits that are typical of the Mexican people:
 
-          Patriotism and respect for traditions, love for freedom, ambitiousness and respect for rank.
 
-          They can easily break their word. They can be late for a meeting.
 
-          The Mexicans are joyful despite numerous hardships of life. They like, sing, dance, play some music instrument. And, of course, they like football.
 
-          At the same time most Mexicans can be reserved. They don’t like it when others try to worm themselves into their confidence.
 
 
 
 
 
 
What are the threats of investing in Mexico?
 

 


 

The latest global economic crisis seriously affected Mexico’s economy, much more seriously than any other Latin American economy: in 2009 Mexico’s GDP declined by 7.3% while the country’s external trade volume lost 25%, simultaneously increasing the county’s public debt. The Mexican stock market dropped by 29%. The national currency lost 35% of its value against the US dollar. According to the Latin American Association of Traders and Investors under Masterforex-V Academy, the crisis revealed the problems existing in Mexico’s economy as well as the threats that foreign investors may encounter when investing in it.
Let’s look at the most considerable threats:
·         Incompleteness of economic modernization. Some experts say that the core of Mexico’s economic problems is the fact that numerous structural reforms are still incomplete, the country isn’t fully modernized. Mexico still lacks innovation and spends too little on infrastructure.
·         State monopoly. The country’s public economic sector is still the biggest and strongest one. For example, the state-owned oil-and-gas company “Pemex” is the only company that has the right to extract oil and gas on the Mexican territory. The company donates most of its income to the country’s budget. That is why the company doesn’t have enough money to modernize its infrastructure. As a result there is a decline in oil production and gasoline deficit.
·         Dependence on oil. As we have already said, the country’s economy is greatly dependant on oil exports, which make up the biggest share of Mexico’s budget. Obviously, today’s growing oil prices will make it possible for Mexico to earn more money. However, it may result in some serious risks for the national economy. For example, the cost price of Mexican products may rise, thus making them less competitive or uncompetitive at all, which in its turn will reduce the export. Moreover, Mexico, a major oil exporter, has to import oil products as the country’s oil-refining industry is not developed enough to satisfy the needs. Another factor is that the uptrend of food and oil prices won’t last forever. And finally, the country’s oil reserves are running low. The proved reserves will be completely exhausted in 10 years. Of course, new oil deposits are being discovered, but they contain heavy and super-heavy oil, which is not as profitable as light oil. That will inevitably affect Mexico’s economy.
·         Dependence on the US market. Petr Yakovlev notes that up to 90% of Mexico’s export goes to the US while over 70% of the money invested in the Mexican economy is of US origin. More than 1 million US citizens own property in Mexico. That is why Mexico was among the first countries to feel the pressure of the global crisis because it started in the US. Any decline in the US economic growth instantly hinders the development of the Mexican economy. Conversely, Mexico’s economy improves when the US economy does the same.
·         The weakness of the country’s competitive environment. The monopolistic nature of the Mexican business restrains the development of small and mid-scale businesses. Monopolists control nearly every single sector of the country’s economy – from oil to food industry (Pemex, Bimbo, Telmex, Maseca etc). Professor George Grayson (USA) assumes that Carlos Slim is one of those “fat cats” that hinder the development of the Mexican economy. Indeed, its telecommunications company called “Telmex” used to be Mexico’s only cellular provider for 15 years. Today it controls 92% of the country’s cable communications. America Movil (another wireless services provider owned by Carlos Slim) controls 73% of the market.
·         Mass poverty. In Mexico there is a huge gap between the rich and the poor - 10% of the Mexicans consume 40% of the GDP. 25% of the population cannot afford to spend more than $150 a month, $35 of the sum is given as a child benefit. Part-time employees make 25% of the employed. Obviously, it favors the criminalization of a certain part of the country’s population. However, the authorities do a lot to help the poor: affordable housing, free education, well-developed healthcare system, benefits etc.
·         Corruption and drug cartels. Mexico is still a highly corrupt country (98th, according to Transparency International). Bribery is a routine in Mexico, whether you are a big businessmen or a poor guy. It is said that the Mexicans give away about $5B a year as bribes (it is equal to 9% of the GDP). Another problem is criminality. It is difficult to attract more tourists when every day the media report about beheaded bodies or shoot-outs in the streets. Mexico is being stricken by drug wars. According to The Wall Street Journal, almost 40000 people have already been killed since 2006. The authorities had to bring troops into several towns not far from the US-Mexican border. While in Central and Southern parts of Mexico the campaign against drug lords has been a success, in the North the war is still going on. One of the main problems is that Mexico borders on the US – the world’s biggest drug consumer. Tom Miller, an expert specializing in Mexico, says that Mexican drug lords earn $25-40B from selling drugs in the US. No wonder that they fight for that.
It should be noted that some drug lords (like Joaquín Guzmán Loera) strive to win public support by covering the losses caused by poor harvests, building homes for the poor, paying pension benefits to the old etc.
 
In a year Mexico will hold presidential elections. There probably going to be a tough fight for the post as Mexico is a presidential republic.
 
Obviously, these are the weak spots hindering the country’s economic development. But foreign investors are still looking for an opportunity to invest in Mexico while being reassured by the fact that the country came out of the crisis relatively fast. Still, nobody can guarantee that investments in Mexico will be profitable. Unfortunately, any investment object has its strengths and weaknesses.
 
 
Market Leader and Masterforex-V Academy would appreciate it if you could participate in a survey. Please, visit the Academy’s forum for traders and investors and answer the question given below:
 
Does Mexico have a chance to become a world power?
 
Yes, it has
No, it hasn’t
 

 

 

 

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