Country risk reference rating: Level 6 (6/9)
Country Risk Outlook: Positive
◆Political Risk
In 2014, the Peña Nieto government vigorously promoted structural reforms and made significant progress in the fields of education, telecommunications, finance and energy, laying a good foundation for the country’s long-term stable development. However, the ruling party and the opposition parties are also engaged in fierce political games around structural reforms. In addition, the public security situation in Mexico remains severe, and the social polarization between rich and poor has intensified. Mexico’s complex domestic political struggles and social conflicts constitute major political risk factors in the near future.
The foreign policy goal of the Peña Nieto government is to enhance Mexico’s status on the global stage and promote diversified diplomacy with U.S.-Mexico relations as the core. The Mexican government has always regarded economic and trade cooperation as the core and primary issue of U.S.-Mexico relations, and continues to deepen its comprehensive strategic partnership with the United States. In addition, in order to further promote the strategy of diversifying economic and trade relations, Mexico also maintains long-term friendly relations with countries in the Asia-Pacific region. In addition to establishing a comprehensive strategic partnership with China, Mexico has also signed bilateral free trade agreements with Japan, Indonesia and other countries.
◆Business environment
Mexico implements a two-level taxation system, federal and local government. The federal government levies income tax, value-added tax, customs duties, property taxes, etc. In addition, federal taxes also include some taxes levied on mineral resources and special goods and services, such as alcoholic beverage taxes, tobacco taxes, gasoline taxes, and telecommunications service taxes.
The country’s current “Foreign Investment Law” stipulates that foreign companies have flexible and diverse access methods for investment in Mexico: buying shares in a Mexican company and becoming a partner of the Mexican company; purchasing fixed assets of the Mexican company; establishing new production lines or branches, Representative offices, etc.; expand and establish existing organizational structures.
Mexico has sufficient labor resources. More than half of the country’s 120 million people are under 29 years old, so the country will have an abundant labor force until at least 2028. In addition, wages in the country are low, which has allowed the development of Mexican manufactured goods to grow by leaps and bounds. According to an infrastructure construction report released by the World Economic Forum, Mexico ranks only 68th among 144 countries surveyed, 15 places behind its productivity level.
Judging from the four indicators of tax system, investment convenience, infrastructure and administrative efficiency, the business environment has been improved to some extent in the context of Mexico’s promotion of structural reforms and large-scale attraction of FDI. Measures such as the energy reform bill signed by the Pena Nieto government reflect Mexico’s determination to improve the business environment, actively attract foreign investment, and promote domestic economic development. Therefore, Mexico’s business environment risk outlook for 2014 is positive.
◆Economic Risk
Since the year of the international financial crisis, the Mexican economy has continued to be sluggish and its overall performance has been poor. The annual growth rate in 2013 was only 1.3%. The main reason is due to the decline in demand for Mexico’s export products from the United States, its main trading partner, and the weakness of the external market. Mexico’s export growth rate has declined significantly. The government’s implementation of austerity public expenditure policies has led to a severe reduction in investment in the infrastructure sector, and the construction industry sector has encountered a serious crisis. The above factors are the main sources of economic risks in Mexico and pose certain threats to the stability of Mexico’s future economy. However, with the moderate recovery of the global economy, Mexico’s economic situation is expected to improve in 2014.
In 2014, Mexico’s external economic environment improved, domestic and foreign demand recovered, and structural reform measures in the labor, telecommunications, fiscal, financial and energy sectors were gradually implemented, which was conducive to economic recovery. The federal government will expand budget expenditures and launch a series of new plans to promote economic and social development to provide good conditions for economic recovery. For example, in April 2014, the government proposed to invest more than US$300 billion during its term of office to improve infrastructure construction in areas such as transportation and communications.
In October 2013, the Mexican government promulgated a new fiscal reform bill. The bill aims to increase the amount of new taxes that accounted for only 1% of total GDP in 2014 to 3% in 2018. This increase is the lowest among OECD member countries.
For a long time, China has been Mexico’s fourth largest export destination and second largest import source. According to statistics from the Mexican Economic Secretariat, the bilateral trade volume between Mexico and China was US$67.79 billion in 2013, an increase of 8.2%. Mineral products, transportation equipment and mechanical and electrical products are the top three categories of goods exported by Mexico to China, accounting for 67% of Mexico’s total imports from China in 2013. However, there is a large imbalance in the trade between China and Mexico, and China has become Mexico’s largest source of trade deficit.
◆Policy suggestions
In Mexico’s 2015 mid-term parliamentary elections, whether the opposition Democratic Revolutionary Party and National Action Party can occupy a majority of seats in parliament is a key factor in whether the Pena Nieto government can continue to implement government structural reforms, especially fiscal reforms. It will have a great impact on Mexico’s long-term society. has a significant impact on stability and economic development.
The Mexican government passed a series of structural reform bills in 2013, laying an institutional foundation for long-term social development and economic growth. Mexico is focusing on increasing infrastructure construction, attracting more foreign direct investment, solving public safety issues and expanding the scale of the manufacturing market. This is bound to boost Mexico’s economic growth in the future, but only if the government’s measures to combat corruption and enhance transparency are implemented.
