Warning: You are using an outdated Browser, Please switch to a more modern browser such as Chrome, Firefox or Microsoft Edge.

Open with Edge
LOGIN
Search

MEXICO

Questionable policy choices and lack of confidence pave way for anemic growth

BB2

MEDIUM RISK for enterprise

  • Economic risk

  • Business environment risk

  • Political risk

  • Commercial risk

  • Financing risk

  • Economic risk

  • Business environment risk

  • Political risk

  • Commercial risk

  • Financing risk

The country risk assessments are your North Star metrics to make the right decision for your business and understand the risks in international trade. We have always the best solution for your needs

Swipe to view more

GDP USD1258.3bn (World ranking 15, World Bank 2019)
Population 127.6mn (World ranking 10, World Bank 2019)
Form of state Federal Republic
Head of government Andrés Manuel Lopez Obrador (President)
Next elections July 2021
  • Sound macro-policy framework: fiscal spending is capped and pro-active inflation-targeting central bank
  • Moderate debt ratios and strong external position (manageable current account deficit, large FX reserves)
  • Strong legacy from pro-business reforms in the last decade
  • Structural business environment exceeds Latin American average
  • Durable political framework with stable handovers of power
  • Member of OECD
  • Easy access to capital markets
  • Support from IFIs likely if needed
  • Financial integration means market volatility is driven by both domestic (more or less pro-business stance) and external (US) policy risk. Trade uncertainty dissipated but doubts over the implementation of NAFTA remain
  • Fiscal position highly sensitive to oil price (oil = 30% of public revenues)
  • Sensitive to US business cycle (around 80% of exports)
  • Skewed income distribution (geographically as well as among socio-economic groups), still high poverty levels
  • Security issues related to drug-trafficking
  • Rule of Law and control of corruption below Latin America’s average
useful description of image if informative and not decoration only.

From resilience to turbulence, then Covid-19 crisis mismanagement

Mexico’s economy showed resilience in 2016 (+2.9% GDP growth), 2017 (+2.1%) and 2018 (+2.0%). Indeed, the country managed to put up with uncertainty linked to President Trump’s foreign and trade policy, in addition to domestic uncertainty related to the 2018 election and the victory of a left-wing president. However, the election of Andrés Manuel Lopez Obrador inflated hopes (consumer confidence rose to the highest levels ever recorded) that failed to materialize, as it did not translate into increased private consumption and investment plummeted. Real GDP contracted -0.3% in 2019, mostly due to a severe hit to investment (-5%); this can be attributable to high domestic policy uncertainty and several policy decisions that overturned previous pro-business reforms, such as closing the energy sector to foreign players.

In 2020, we expect the Covid-19 shock to be devastating for the economy, as the country has the third-highest number of deaths (as of August 2020). GDP contracted -17.3% q/q in Q2, mostly due to a decline in the manufacturing sector (-23.6%) and the services sector (-14.5%). We expect a -9.5% contraction overall in 2020 for two main reasons: (i) external demand, in a country integrated in global manufacturing supply chains, took a huge hit; (ii) apathetic policymaking, i.e. the absence of a fiscal relief package – in a country where debt levels are under control and the government posts a primary surplus – means the state has failed to provide for the emergency liquidity needs of companies and households. The president has rejected tax breaks for businesses and refused to tap into the USD61bn IMF flexible credit line Mexico has access to while committing to fiscal austerity. While the short-term outlook is positive for the manufacturing sector (renewed stimulus in the US, and a vaccination campaign starting in 2021), the medium-term outlook remains challenging because of the absence of a stimulus, threatening household incomes and companies’ financials, and the latest policy moves of the administration that threaten the soundness of the business environment. Labor market indicators show that there is still a long way to a full recovery; in April, 12mn people left the labor force and though 8.4mn had returned in September, 6.2mn jobs are still missing. Mexico should be a major loser of the Covid-19 pandemic and will take three years to come back to its pre-crisis levels.  
useful description of image if informative and not decoration only.

Still solid macroeconomic and fiscal fundamentals, competitive yet deteriorating business environment

Mexico’s current account deficit is entirely covered by FDI inflows and the country benefits from easy access to capital markets, besides enjoying a Flexible Credit Line from the IMF. FX reserves amounted to USD177bn at the end of 2019, after reaching a low of USD169bn in 2017, notably as the central bank has intervened in the FX markets to support the peso in a context of high US foreign-policy uncertainty. However, higher remittances in H1 2020, an unexpected reaction to the Covid-19 crisis, helped boost FX reserves to a five-year high of USD189bn. Import cover now stands at 4.4 months, a comfortable level.

Mexico’s monetary policy has been extremely cautious and restrictive, pursuing three goals: (i) anchoring inflation expectations so they converge towards the 3% target, (ii) aligning with the Fed’s tightening momentum and (iii) smoothing effects on the currency due to uncertainties related to Trump’s economic policy. Yet this monetary policy appears to have hindered growth. During the Covid-19 crisis, Banxico eased rates from 7.25% to 5% but its stance remains less accommodative than peers as the interest rate is still higher than four years ago. The central bank has room to cut rates again and we expect the interest rate to be even lower by the end of 2020.  

Mexico enjoys relatively sound public finances. The public debt-to-GDP ratio has increased from 42% in 2010 to close to 53.8%, which led the administration to commit to public primary surpluses, even during the Covid-19 crisis. Due to the strong recession, we forecast that the debt-to-GDP ratio could exceed 60% in 2020. Household debt stands at a reasonable level. Credit to the non-financial sector is lower than in other emerging economies.

Mexico’s structural business environment is the second best in the Latin American region, losing its first place to Chile last year according to the 2020 World Bank Doing Business Survey. It ranks 60th worldwide out of 190 countries (down from 54th in 2018). However, key shortcomings remain in its World Governance Indicators, specifically the areas of rule of law (152nd) and control of corruption (170th). Future challenges include improvements to the tax system and raising the female labor participation rate, which is lower than the Latin American and OECD averages. Mexico’s tax collection rate stands at 13% of GDP vs. at least 16% of GDP in its regional peers and 25% of GDP in high-income countries. Successive administrations have also failed to curb escalating corruption and crime that stifle economic and social outcomes. Since the election of AMLO, the business environment hasn’t stopped deteriorating. Recent policy moves include: (i) changes to the rules in the electricity sector, penalizing renewables projects to favor the national power company CFE, which has triggered complaints and threats of arbitration and (ii) obliging the central bank of Mexico to purchase from banks US dollars whose origins have not been verified. While the proposed legislation aims to help lower income groups who receive remittances, this obligation for Banxico to accept and convert such funds would reduce its independence and would represent a significant weakening in Mexico’s anti-money laundering/combating the financing of terrorism (AML/CFT) controls. - December 2020

Trade structure by destination/origin

(% of total)

Exports Rank Imports
United States 74%
1
50% United States
Canada 6%
2
18% China
China 3%
3
4% Germany
Germany 1%
4
3% Japan
Japan 1%
5
3% Korea, Republic of

Trade structure by product

(% of total)

Exports Rank Imports
Road vehicles 23%
1
14% Electrical machinery, apparatus and appliances, n.e.s.
Electrical machinery, apparatus and appliances, n.e.s. 11%
2
10% Road vehicles
Telecommunication and sound recording apparatus 9%
3
7% Telecommunication and sound recording apparatus
Office machines and automatic data processing machines 6%
4
6% Other industrial machinery and parts
Other industrial machinery and parts 5%
5
5% Petroleum, petroleum products and related materials
The law provides no framework on standard payment terms, but it is common to rely on 30 days credit starting from the date of the invoice. In practice, payments take place wihtin 40 to 50 days on average, whilst delays of 15 to 30 days may be expected.

  • Low

  • Medium

  • Sensitive

  • High

  • Payments

  • Court proceedings

  • Insolvency proceedings

  • Payments

  • Court proceedings

  • Insolvency proceedings

The court system is complicated by its federal structure and it is known for a lack of transparency and independence. Business disputes are not dealt with by specialized judges and in practice the fast track mechanisms which could facilitate proceedings when the claim is straightforward cannot be relied upon. Overall, procedural delays and costs are significant and pre-legal action remains the most efficient means of collecting debt.

The debt restructuration process is not efficient at all, and proceedings may last for years (ex. Mexicana). As a result, liquidation is in practice the default procedure when the debtor becomes insolvent and the chances of collect debt through this channel are very low.

Download the entire collection complexity PDF:

Collection complexity Mexico 757 KB

LATEST NEWS ABOUT MEXICO

Contacts

 
Euler Hermes Economic Research
research@eulerhermes.com
Georges Dib
Economist for Latin America, Spain and Portugal
georges.dib@eulerhermes.com

Read our latest reports 

Popular Risk Reports: Americas

Popular Risk Reports: Europe

Popular Risk Reports: Asia Pacific

Popular Risk Reports: Middle East

Want to discover more?

View our local website

Read Our Latest Blogs

questions-expand-into-new-markets
questions-expand-into-new-markets

Expanding Into New Markets: The Key Considerations

How to ensure you’re fully ready before expanding to a new market? Check out the key questions you should answer.

Read the article
Assessing Customer Creditworthiness - Traffic Light
Assessing Customer Creditworthiness - Traffic Light

How to Assess the Creditworthiness of a Customer

Checking the creditworthiness of new customers is important to ensure a steady cash flow. Learn the best practices for assessing new clients.

Read the article

Avoid High Customer Concentration Risk

High customer concentration occurs when a single customer accounts for 20% or more of your business’ revenue. Learn more about the risks involved from Euler Hermes.

More information

What To Do If a Client Doesn't Pay

Suffering from an unpaid invoice can feel overwhelming. Contacting the client in a courteous way should be your first step. Learn more about how to get a client to pay an invoice.

More information
10 Signs Your B2B Customer Won't Pay
10 Signs Your B2B Customer Won't Pay

Infographics

10 Signs Your B2B Customer Won't Pay

Unpaid invoices are serious threats to businesses' financial growth. Read these 10 tips from Euler Hermes on how to detect signs of customer non-payment here.

More information
Chess Game - Data-Driven Customer Decisions
Chess Game - Data-Driven Customer Decisions

How to Use Big Data to Gain a Competitive Advantage and Boost Sales

When growing a business, it is important to be data-driven in your approach. Learn how to leverage big data to grow sales and beat out the competition.

Read the article
City Skyline - A Guide to Credit Insurance
City Skyline - A Guide to Credit Insurance

What is Trade Credit Insurance Coverage?

Learn about trade credit insurance including what it is, what’s covered, benefits and how it works. Visit Euler Hermes today to find out how we can help protect your business.

Read the guide
6 Steps to Reduce DSO
6 Steps to Reduce DSO

6 Steps to Reduce DSO

Days Sales Outstanding is a key measure to track for a business’s healthy cash flow. Learn how to improve your company’s cash flow by reducing DSO with Euler Hermes.

More information
Chess Game - Data-Driven Customer Decisions
Chess Game - Data-Driven Customer Decisions

How to Use Big Data to Gain a Competitive Advantage and Boost Sales

When growing a business, it is important to be data-driven in your approach. Learn how to leverage big data to grow sales and beat out the competition.

Read the article
Bankruptcies and B2B Payment Issues
Bankruptcies and B2B Payment Issues

EH Trade Talk: Bankruptcies and B2B Payment Trends

In this episode of our EH Trade Talk, host Andrew Gertz talks with guest Steve Georgetti, VP and Regional Director of Information and Grading, about payment default trends and takeaways from bankruptcies in the last 12 months.

Read the article

Customer Credit Management Techniques

Utilizing effective credit management techniques is essential in ensuring late payments don’t jeopardize your business. Get helpful tips here.

Get credit management tips
Disadvantages of Bad Debt Reserves
Disadvantages of Bad Debt Reserves

Disadvantages of Bad Debt Reserves

The soft costs involved in relying on bad debt reserves for your accounts receivable can add up quickly. Visit Euler Hermes to learn about the alternatives.

Learn more

How COVID-19 is Transforming Business

In this EH Trade Talk interview, Aaron Lindstrom, Regional Head of Transformation and Digital Partnerships, will discuss the impact of COVID-19, how businesses have transformed, and finding opportunities even during these uncertain times.

More information

What to Do If a Company Goes Bankrupt and Owes You Money

If your business extends credit to a company that files for bankruptcy, you may have to face unpaid debts. Learn how to protect your cash flow with Euler Hermes.

More information

Doing Business With a Company in Chapter 11

What can you do if a key customer files for Chapter 11 bankruptcy? Learn how to reduce the risk of doing business with reorganizing companies with Euler Hermes.

More information

Get economic & trade content in your inbox

We're always producing new content to help businesses understand economic trends and navigate trade uncertainty.
Sign up for our newsletters to make sure you don't miss anything.
Subscribe Today