Business Environment in Mexico
Overview
The Business Environment in Mexico
An Overview of the Business Environment in Mexico in 2022
February 2022
Before the coronavirus outbreak, economists predicted that Mexico was heading to be the seventh economy of the world in 2050 thanks to the business environment in Mexico. Thus, investing in Mexico seemed to be an attractive option to foreign investors. Accordingly, Mexico would be growing at a 3.5% annual average rate over the next three decades, a growth rate superior to that of developed economies. [1] This is the result of a shift from protectionist policies towards more liberal economic policies since the beginning of the 1990s, particularly, with the North American Free Trade Agreement (NAFTA). Today, Mexico is one of the most attractive destinations for foreign direct investment according to UNCTAD.
Business Environment in Mexico: A Mix of Positive and Negative Indicators.
Mexico’s size of the economy (GDP 1,046 US$billion), demographic (124 million people), sound macroeconomics, stable public finances, as well as recent amendments to strategic economic sectors (energy, tax, finance, etc.) have contributed to a better economic performance according to the OECD.
Needless to say, sound economic fundamentals is not enough to convince foreign investors to invest in Mexico. I recognize that there is still much to be done to improve the general conditions of life for Mexicans, as well as for the business environment. The World Economic Forum (WEF), in its Global Competitiveness Index, identifies the following five most problematic factors for business in Mexico:
Corruption
Crime and Theft
Inefficient Government
Tax Rates
Tax
Current Political Environment in Mexico.
Mexico is living a historic moment. The Mexican political map changed drastically following the elections held in July 2018. The National Regeneration Movement (Morena), a new left-wing force, became the main political party, controlling the federal legislature in both chambers. Moreover, Morena’s leader, Andrés Manuel López Obrador (AMLO), won the presidential race with 52% of the popular vote and took office in December 2018. Since 1997, no Mexican president has had an absolute majority in both chambers, let alone win the popular vote.
The Mid-Term Elections in 2021
However, Morena and AMLO faced a defeat in the mid-term elections (2021) since they lost key states, such as Nuevo León, and most importantly they lost a substantial number of seats in the chamber of representatives. In fact, Morena and its allies failed to maintain the so-called qualified majority (two-thirds of seats) that allows modifying the constitution. This defeat triggered AMLO to push for his pending and controversial constitutional reforms, such as in the energy sector, to secure his vision regarding the so-called “4th transformation” of the country.
Mexico’s Economic Policies
AMLO has mixed views regarding economic policies. He has, on the one hand, openly expressed opinions against “free market policies” in certain sectors like energy.
Shifting towards State Control in the Energy Sector in Mexico
In fact, the Ministry of Energy and other government agencies have introduced or amended policies that have, for instance, affected renewable energy investments. The constitutional reform project on the energy sector aims, precisely, to give CFE and Pemex (State-Owned Enterprises) mandatory higher participation and control of the energy market, i.e. electric and oil & gas.
Despite government actions against the private in the energy sector, Federal Courts have granted injunctions against energy policies. It is uncertain whether the energy sector will continue to attract foreign investment in Mexico.
Market Oriented Policies: International Trade in Mexico
On the other hand, his administration promotes international trade and foreign investment, negotiated USMCA as well as the modernization of the EU-Mexico Free Trade Agreement, created a “free trade zone” along the northern border, among other matters.
Foreign companies, particularly in the manufacturing sector, should see this as a positive sign and consider investing in Mexico.
Austerity Measures and the Pandemic
Before the pandemic, the Federal government publicly held that it will not increase debt, it implemented policies that are affecting business, directly or indirectly, such as the so-called “austerity measures.”
According to news reports, these measures have increased the delay of responses or decisions on behalf of authorities, but they have also had an impact on the economy in general as a result of a lack of public investment. Indeed, the Federal Government is using a substantial portion of the budget towards controversial projects, namely a new airport, the Mayan train, and a refinery.
During the pandemic, the Federal Government did not design support programs for enterprises. The reason behind this decision is to avoid creating debt and austerity measures.
Foreign investor must have a proper understanding of not only the political, economic, and business environment in Mexico, but also the legal framework to decide whether to invest in Mexico or not.
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The Pandemic and the Business Environment in Mexico
Besides being the 15th largest economy in the world, Mexico is a “free market” economy that is opened to international trade and foreign investment. As a result, Mexico has a highly diversified economy, modern industries, and a developed financial market. In recent years, business facilitation measures have been on the political agenda as well as tackling corruption, which is now more relevant than ever as a result of Mexico’s modern free trade agreements.
In this vein, Mexico’s competitiveness relies on its extensive free trade treaty network as a pivotal force for its economic development. Therefore, the United States-Mexico-Canada Agreement (USMCA), which entered into force in July 2020, will continue to attract foreign investment, particularly, in the manufacturing sector.
The Honest Answer: It Depends.
The current business and political environment are halting new investments in the energy sector, including renewable energies. Other sectors or investments that have been in the eye of the hurricane (or the President), such as the New Airport of Mexico City that was canceled, the Constellation’s project plant in Mexicali as a result of water issues, lithium extraction, among others.
However, the manufacturing sector is the exception. As a result of the Biden administration’s vision on re-shoring strategic value chains and USMCA, Mexico seeks to be part of such a plan and capture investment that is relocating from Asia in goods, such as semiconductor chips, high-capacity batteries, including electric-vehicle batteries, among other.
Exporting to Mexico and the Retail of Goods and Services
The pandemic has hitten hard on the Mexican economy but it is slowly recovering. In 2021, the GDP registered a 5% growth, after an 8% decrease in 2020. Besides consumers having smaller pockets, the United States Trade Representative (USTR) has also identified some government measures that impact certain goods and services in its foreign trade barrier report 2021. Other than that, exporters and potential investors should continue to doing business as usual.
More About the Business Environment in Mexico
Competitiveness
A summary regarding Mexico's positive and negative indicators according to the World Bank and the World Economic Forum .
Industrial Land
An executive summary regarding key aspects of industrial land in Mexico. Foreign investment restrictions may apply.
Manufacturing in Mexico
An executive summary about Foreign Direct Investment and International Trade in the Manufacturing sector.
Security
How bad crime affects business in Mexico? Every couple of years a business chamber carries out a survey and presents a report regarding the security and crime environment in Mexico. We prepared an executive summary regarding the findings.
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