KITE Invest recently had the pleasure of sitting down with the Mexican Stock Exchange’s Pedro Zorrilla, the Senior Vice President for Institutional Relations, in order to assess Mexico’s economic landscape and the country’s great economic potential and relations with the United Kingdom.
KITE Invest: What are your views on the scope of the reforms undertaken by Peña Nieto’s administration and their capacity to drive growth and social welfare?
Pedro Zorrilla: The perspective overall has been pretty positive. The country has for a long time been working to regain first its economic stability, and second to push through changes in order for the economy to grow faster.
It is now the time and opportunity for Mexico to take hold of its new capabilities and to grow and develop the country more than we have been able to in the past.
There are two necessary ingredients for these changes to materialize in the years to come. First are economic stability and strong economic institutions and the second ingredient has to do with the reforms themselves. Mexico has been discussing the reforms for a long time and it has been an effort to come together on an agreement and build a consensus. Fortunately, the time has come and we now have these reforms in place.
There are several reforms that will help the economy gain flexibility, make the job market more flexible, strengthen the fiscal position of the government, enhance business competitiveness and conditions, and of course, take better advantage of the potential of telecoms and the energy sectors.
KITE: Mexico’s economy grew 1.1% last year, the lowest since the 2009 recession, and estimates have been lowered for the 2014 GDP growth projections. Although reforms have taken hold, what are your views on the reasons behind the slow growth?
PZ: It has to do with the realization that this reform effort is taking more time than originally anticipated to become fully effective. Not only with the constitutional reforms first and then the legal reforms that were imperative, but also, the time that was needed to implement these changes.
Additionally, the slow growth also has to do with internal and external factors that have prevented the economy from growing faster. From the perspective of an emerging economy the global recession has been severe, not only in terms of economic activity in countries with a strong external sector, but also, considering the impact of financial condition risk aversion on exchange rates, and of investment portfolios restructurings of risk; the performance of the Chinese economy, the difficulties still being faced in Europe, and the new outlook for the monetary policy in the US are just some factors. Under these conditions, global players have not distinguished good from relatively less good emerging markets.
KITE Invest: What is your forecast on the number of Initial Public Offerings in the short terms, as well as, challenges to increase the number of companies listed on the Mexican Stock Exchange?
PZ: That is something that is difficult to forecast. 2013 was a record year in terms of market financing, not only in IPOs, but also, in Follow-on offerings by listed companies. In the Stock Exchange we also list corporate bonds, and the corporate debt market was also very active as well in 2013.
The context of the economy in 2014 has not favoured new companies to come to the market. We had a bad first half with almost no activity, and a better second half with 11 transactions in the equity/capital market, including IPOs, Follow-ons, and new Fibras (the equivalent of the Real Estate Investment Trusts in the US and Canada).
In terms of increasing the number of companies listed in the Stock Exchange, a good sign of evolution and development is the fact that we are welcoming mid-size companies. However, it is a challenge to increase the number. There are only 137 companies listed in the equity market, which is a very small number relative to the size of the Mexican economy. Using the Stock Exchange as a vehicle of funding the objective for the future is to keep increasing the number of companies, including of course the participation of mid-size companies.
KITE: Next year has been designated the Dual Year between Mexico and the UK. With this in mind, what strategic opportunities does Mexico offer British investors?
PZ: Opportunities are great. For a long time the economic relationship between the two countries has been thin, even though historically Mexico and the UK have been close.
Some years ago when Mexico signed onto the North American Free Trade Agreement, simultaneously Mexico was also entering into the Organisation for European Economic Co-operation. This is significant because it signals that for a long time Mexico has focused on diversification and that a closer relationship with Europe would be positive for Mexico. Now is the time to get these relationships working more formally, and the upcoming Dual Year will give Mexico the opportunity to better engage in this objective.
In the British and Mexican markets the Dual Year provides a great platform for both countries to work more closely together, and especially as there is tremendous support from both governments, it should be taken advantage of.
KITE: Lastly, what synergies would you estimate exist between the Mexican Stock Exchange and London Stock Exchange?
PZ: The Mexican Stock Exchange has had a very good relationship with London Stock Exchange (LSE). We discuss from time to time opportunities to do business together.
One area where I think it would be good to start a project with our LSE colleagues would be: Small and Medium Sized Enterprises and their access to capital though the Exchange. Taking into consideration the financial reform that passed last year, some positive changes were introduced into the Mexican Securities Market Law that would facilitate the creation of a market for smaller-sized companies. It is for this reason that we have the AIM Market of the LSE very much in mind. We are very interested in getting more details about how the AIM Market has been built and evolved, because it is a very efficient platform for smaller companies to raise capital and grow faster.
Dual listing should also be more greatly explored, as this will also help to generate more interest by investors.