The sweeping reforms of the Peña Nieto Administration are generating economic growth and a stir of interest from foreign investors. KITE Invest met with the CEO of ProMéxico, Francisco N. González Díaz, for an analysis of Mexico’s traditional and emerging sectors, their development potential and their current notable growth.
KITE Invest: After three decades of struggle to raise growth rates, what are your views on the scope of the reforms undertaken by the Government of Peña Nieto and their ability to boost growth, competitiveness, and social welfare?
Francisco González Díaz: The Government of the Republic is driving growth, competitiveness, and productivity in the country in order to build a more equitable and prosperous Mexico, one like never before.
An economy cannot change overnight, thus, most benefits will mainly be seen in the long-term; therefore, the scope of these reforms can only be analysed in greater detail in the future. Nonetheless, an OECD analysis has shown how part of the potential benefits of the reforms also has a positive impact in the short term, especially in terms of increasing investment and business, as well as implementing a restructuring of government.
It should be taken into consideration that eight of the eleven economies with a population over one hundred million people in 2014 have reformed at least one of the measured components of the World Bank’s Doing Business Report, including Mexico. Our country launched an ambitious package of eleven reforms, six of them aimed specifically at improving the productivity of the economy:
• The labour reform will provide greater flexibility to the labour market and encourage formal employment.
• The education reform will ensure that there is human capital for an increasingly competitive labour market.
• The economic competition reform aims to remove barriers for business and improve market efficiency.
• The telecommunications reform has opened the market to new investments, both foreign and domestic. Its effects are already noticeable, as prices have fallen and there is now a flat rate for all domestic calls, twenty billion pesos in long distance calls have been generated, and there is free Internet access in 65,000 public spaces
• The tax reform provides for a simpler tax system, while boosting the financial reform in terms of loans affordability.
• Lastly, the energy reform introduces new mechanisms to open the energy sector to domestic and foreign investment for the first time in 75 years. The first benefit we have witnessed is the decline in electricity rates: from March 2014 to March 2015 between 18% and 26% in the industrial sector, between 7.5% and 16% in the business sector, and less than 2% in domestic consumption.
KITE: What do you consider to be the key drivers of economic growth?
FGD: Mexico is one of the most competitive countries in the world in terms of productive investment. This is due to several factors, among which I would highlight its macroeconomic and political stability, low inflation, size and strength of its domestic market, highly skilled human capital, and ability to produce advanced manufacturing.
Thanks to its macroeconomic stability, Mexico is one of the countries with the best business climates. Relevant indicators reflect the position of the country in terms of foreign trade. For instance, in 2014 Mexican exports totalled more than 397 billion, representing a record high. In addition, international reserves exceeded 193 billion, which also marked a milestone.
KITE: How would you consider Mexico, a modern or traditional economy?
FGD: The country has many traditionally strong and productive sectors. Manufacturing and the automotive and auto parts sector together represent an important share of total GDP, but there are also emerging sectors with outstanding growth rates, such as aerospace and creative industries. Given this scenario, both the Government of the Republic and the state governments in conjunction with the private sector and academia have been working together, channelling efforts to drive the future of these sectors in a coordinated manner.
KITE: What is your analysis of the traditional sectors that make up the country’s economy and new ones that are being developed to achieve Mexico’s growth targets?
FGD: Currently, Mexico occupies a leading role in traditional sectors, such as food production. We are the leading exporter of avocado, beer, guava, mango and an extensivevariety of other agricultural and processed food products. We are the second food supplier to the USA and the third largest producer of processed foods in America.
We are currently experiencing a paradigm shift in trade; global value chains are now the basis of the new model. The new logic implies that we need to stop thinking in terms of imports vs. exports, and rather focus on how a country provides value-added products. This value adding model is centred on the initial and final stages of chains; innovation, design, service providing, logistics, and retail and distribution become highly relevant as they correspond to the stages in the chain where the greatest value can be added to the product. This new approach has also allowed us to envision new and greater opportunities for Mexico in sectors such as creative industries, manufacturing, shipbuilding, and construction of smart cities.
In recent years, Mexico’s creative industries sector has substantially increased its competitiveness. Today Mexico is the leading exporter of creative goods in Latin America and we have are most important technological pool talent in the region. We can also point out the health sector’s medical tourism industry, which has a great business potential and where Mexico is already the second largest global exporter of these services.
KITE: What are your views on the strategic opportunities Mexico offers British investors after the structural reforms?
FGD: Some of the main sectors of interest to British companies seeking to invest in Mexico are creative industries, energy, aerospace and automotive.
In the latter sector, Mexico is already one of the world’s top four exporters and continues to increase its competitiveness, so in the years to come Mexico will definitely play a leading role. In 2014 the country managed to climb to the seventh position as a global producer. The most recent investments are particularly interesting because they are directed to the production of luxury cars, reaffirming Mexico as a global platform for premium vehicles.
Our country is also leveraging a strong foundation in the automotive industry in order to create success in the aerospace sector, a sector with over 6.3 billion dollars in exports in 2014. The increase in business is another indicator of the success of this sector. Today we have over three hundred aerospace companies in the country, where in 2005 we only had 60.
Mexico is a fertile field for British investment in creative industries. It provides an environment in which entrepreneurs can grow their business and any project can come to fruition. We are recognized as the top destination in Latin America, because we have the necessary facilities and suppliers. In this regard Mexico has the world’s largest aquatic film location and has more than 1,500 companies that offer a wide range of creative services.
Our country is a leading actor in energy production, occupying the sixth place worldwide in shale gas reserves and the thirteenth in oil reserves and refining capacity. For decades Mexico had barriers to foreign investment in the energy sector, which also meant higher prices for businesses and consumers. Now, for the first time in over 75 years, private companies can participate in the energy sector through licenses, contracts, and production sharing utility.
British companies can also do joint ventures with Mexican companies for contracts with suppliers throughout the oil and gas and power operation supply chains, and with processes and services such as security, software development, piping integrity management, education, training and refining, among others.
Due to the manufacturing of aerospace products and luxury vehicles, to architecture, to audiovisual production, and the need for training in the energy sector, Mexico is a strategic partner for British companies’ growth and expansion projects globally.
Over the next months both countries’ opportunities will be enhanced thanks to the Dual Year 2015 UK-Mexico, establishing stronger trade ties, investing in joint projects, and forming alliances that will allow us to prosper together throughout the 21st century.