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The Mexican Economy and
Investment Opportunities
Lorenza Martínez Trigueros
August, 2011
1. Solid economic fundamentals
2. Attractive domestic market
3. Industrial development policy
Why Mexico? Why now?
Source: INEGI
Real GDP (Annual growth rate)
Strong recovery and macroeconomic stability
Annualized growth
2010: 5.4% 2009: -6.1% 2008: 1.2% 2007: 3.3% 2006: 5.2%
Economic Global Activity Index (IGAE) (Annual growth rate)
The Mexican economy has maintained higher annual growth rates than those observed in recent years.
Note: LB and UB are the lower and upper bounds for the 2011 forecasted value by Banxico
Fore
cast
fo
r 2
01
1
Source: Banxico
Strong recovery and macroeconomic stability
Source: Bloomberg
EMBI + Index
Inflation remains in line with the inflation target. The country risk compares favorably with other economies.
Consumption Price Index (Annual variation; %)
Observed
Inflation target
Interval variability
2010 Q4
2011 Q4
2012 Q4
3% (+/- 1%)
Strong recovery and macroeconomic stability
Despite the perceived slowdown in the U.S. and the World, Mexico is in a situation less vulnerable than other countries.
Macroeconomic Environment 2010-2011 (Score and Ranking)
Source: World Economic Forum. The Global Competitiveness Index: Basic Requirements. 139 economies are considered.
Emerging market overheating index, 2011
Source: The Economist
0 20 40 60 80 100
Argentina Brazil Hong Kong India Indonesia Turkey Vietnam Singapore Thailand Egypt Peru Philippines Chile China Colombia Poland Saudi Arabia South Korea Venezuela Russia South Africa Czech Republic Mexico Pakistan Taiwan Malaysia Hungary
Strong recovery and macroeconomic stability: the exchange rate
Nominal Exchange Rate (Pesos/USD)
Source: Banxico
Real Exchange Rate Index (Jan 2000= 100; compared to 111 economies)
Source: Banxico
Leh
man
Bro
ther
s B
ankr
up
tcy
Leh
man
Bro
ther
s B
ankr
up
tcy
Average: 102
115
And competitive prices for key inputs
Source: Key World Energy Statistics, EIA
Electricity prices for industry, 2010 (USD / kWh)
Heavy fuel oil for industry, 2010 (USD / tonne)
1. Solid economic fundamentals
2. Attractive domestic market
3. Industrial policy agenda
4. Concluding remarks
Why Mexico? Why now?
Source: AT Kearney, 2010
In the long run, developing countries will outpace G20 advanced economies
Projected average annual GDP growth rate (% 2009-2050)
Source: Goldman Sachs. The N-11: More Than an Acronym. Global Economics Paper No: 153. March, 2007.
1/ Estimaciones de Goldman Sachs
20501
5th
pla
ce
11th
pla
ce
2010
2006
It is estimated that by 2050, Mexico will become the fifth largest economy and its GDP per capita will be comparable with those of developed countries.
20501 2010
Gross Domestic Product (Billion Dollars)
GDP per capita (US Dollars)
Forecasted growth of middle income households1 (%, 2010-2015)
Source: Own estimations based on ata from Winning in Emerging-Market Cities,
Boston Consulting Group (2010).
1/ Middle income households are those with annual income over $10,000 dlls.
Expenditure of households on goods and services for individual consumption
(USD, 2008)
Although income levels in Mexico are similar to those in emerging economies, the level of household consumption is higher.
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
5,000
5,500
Source: Own estimations based on data from Global Purchasing Power Parities and
Real Expenditures, 2005 International Comparison Program - World Bank (2008)
1/The original data are for 2005 and the estimations for 2008 were made using the
observed growth rates from those countries.
1. Solid economic fundamentals
2. Attractive domestic market
3. Industrial policy agenda
i. Trade facilitation
ii. Some sectors
4. Concluding remarks
Why Mexico? Why now?
Trade facilitation based on 3 strategies:
Tariff simplification
Customs facilitation
Institutional strengthening
of COCEX
Tariff simplification
Simple average tariff Industry; %
Tariffs with rate zero Industry; %
Customs Facilitation: Single window system
• One single delivery information window
• Every procedure is electronic
• The information will be delivered only once
• The information and requirements of each procedure will be defined clearly and explicitly.
• Has the Electronic Advanced Signature
• Low risk of permits falsification
• Easy implementation of single petition
• The personal contract will be eliminated.
2. Increases transparency
3. Increases security
4. Facilitates information flow through countries
5. Reduces Risk Corruption
1. Reduces transaction costs
Advantages of Implementing:
Competitiveness: market access
Trade facilitation indicators:
2008 • 74
2009 • 43
2010 • 22
Mexico's position in the sub index for market access WEF
Source: World Economic Forum 2010 Source: Doing bussiness
Trading across borders rank
= improvement
Share of total manufacturing imports, USA (Top countries, %)
USA Imports Dynamics (Annual variation, %)
Source: U.S. International Trade Commission (2011)
-40.0
-30.0
-20.0
-10.0
0.0
10.0
20.0
30.0
40.0
50.0
JU
L-0
9
AU
G-0
9
SE
P-0
9
OC
T-0
9
NO
V-0
9
DE
C-0
9
JA
N-1
0
FE
B-1
0
MA
R-1
0
AP
R-1
0
MA
Y-1
0
JU
N-1
0
JU
L-1
0
AU
G-1
0
SE
P-1
0
OC
T-1
0
NO
V-1
0
Total China Canada Mexico
5
10
15
20
25
30
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
JA
N-1
0
FE
B-1
0
MA
R-1
0
AP
R-1
0
MA
Y-1
0
JU
N-1
0
JU
L-1
0
AU
G-1
0
SE
P-1
0
OC
T-1
0
NO
V-1
0
Mexico Canada China
Mexico has improved its position as a top trade partner to USA despite China’s entry to WTO.
1. Solid economic fundamentals
2. Strong manufacturing platform for exports
3. Attractive domestic market
4. Industrial policy agenda
i. Trade facilitation
ii. Some sectors
5. Concluding remarks
Why Mexico? Why now?
In general, the industrial policy is based on specific instruments…
Human capital
Regulation
Access to financing
Market growth
Government procurement
Promotion of
Innovation
… for several sectors. In particular, some of them exhibit good results: Information technologies, Aerospace, Automotive and Mining.
Information Technologies (IT)
20
What has been done to promote the IT sector in Mexico?
Exports & investment
Human capital
Legal certainty
IT promotion
Competitiveness and innovation
Quality impulse
Funding
PROSOFT 2.0: A long run public policy (2002 – 2013)
7 strategies
Positioning Latin American leader developer of IT solutions and services
with high processing capability.
Investment in IT as GDP %
0.7 1.7 2.3
Billing (MUSD)
2,296 10,870 15,000
Employment
124,245 600,000 625,000
2002 2010 2013
Start, progress and goals
The perception of Mexico in the international market for this sector is positive
Mexico is ranked as the fourth global player in the exports of IT services and BPO after India, the Philippines and China. Gartner analysis
Mexico is the only Latin American country that scored "Very Good" in the assessment of cost, while other countries have had only a grade of "Good." Gartner study
Mexico is set at position 6 in the Global Services Location Index 2011, becoming the first North American country due to the availability of human capital and the financial attractiveness (costs). AT Kearney
Mexico is ranked as the most competitive location allowing a cost savings of 53.4% in activities of Back Office / Call centers, 31.7% in Software Design and 34.1% in Web and Multimedia, compared to the location of U.S. operations. KPMG
Automotive
Strategies for sector development
Human Capital
Auto Decree (Benefits from investments in training)
Management Comittee Labor Skills
PRODIAT* (job preservation)
Investment Attraction
Auto Decree (Gains on investments in productive
infrastructure)
ProMéxico fund (cash payments to foreign
investment)
Competitiveness
PRODIAT (support for market failure
solutions) Auto Decree
(Bonded warehouse, public procurement)
PROSEC (preferential tariffs on inputs)
Technical Standards (Safety and environmental)
Supplier development
Auto Decree (Benefits for purchases from domestic
suppliers to overseas plants)
SMEs fund (Transfer of resources for the creation,
development and consolidation of SMEs)
Innovation Innovatec and Proinnova
(Resources for investment in technological innovation in production
processes)
AERI´s (Resources for the creation of strategic
alliances for innovation)
Technical Standards (Safety and environmental)
*/ In 2009, 518.2 million pesos were allocated for the preservation of human capital in the auto industry through the support of projects type “B”
The automotive sector as a strategic sector
The automotive industry in Mexico is a strong export oriented
sector. In 2010, Ward’s Auto placed Mexico in the
sixth position as vehicle exporter.
The same analysis reveals that it is the
ninth largest producer of motor vehicles
globally.
In 2010, KPMG ranked Mexico as the country
with lower parts production costs in a 10 countries selection
According to the US Census Bureau, in
2010 Mexico was the leading exporter of
automotive products to the United States with a 26% share of
total country imports.
*/ In addition to Mexico, the selected countries were: France, Germany, Italy, Netherlands, United Kingdom, Canada, USA, Australia and Japan
0
20
40
60
80
100
120
140
Me
xico
Au
stra
lia
US
A
Ca
na
da
Fra
nce
Un
ite
d K
ing
do
m
Ne
the
rla
nd
s
Ita
ly
Ge
rma
ny
Jap
an
1 2 3 4 6 7 8
18 19
63
8390
101
Rey
no
sa, M
exi
co
Agu
asca
lien
tes,
Me
xico
Pu
ebla
, Mex
ico
Mo
nte
rre
y, M
exi
co
Shre
vep
ort
, USA
Gre
env
ille
-Sp
art
anb
urg
, US
A
Mo
ntg
om
ery,
USA
Ad
ela
ide
, Au
stra
lia
Mel
bo
urn
e, A
ust
ralia
Par
is, F
ran
ce
Det
roit
, USA
Ma
nch
est
er,
UK
Ham
amat
su, J
apan
Mexico has significant competitive advantages in the automotive industry
26
Advantage in automotive assembly costs (Index 100 = USA)
Position in automotive parts assembly by city (Position of 102 considered cities)
Source: KPMG. Guide to international business location, 2008.
48
40
32 31 30
25 24
23
.5
20
16
0
10
20
30
40
50
Toy
ota
Ge
org
eto
wn
(US
A)
Toy
ota
Ca
mb
rid
ge
(Ca
na
da
)
Ch
rysl
er
Be
lvid
ere
(US
A)
Ford
Dea
rbo
rn (U
SA)
GM
Sil
ao (
Me
xico
)
Ch
rysl
er
Tolu
ca (M
exi
co)
Nu
mm
i (U
SA
)
Toyo
ya P
rin
ceto
n W
est
(USA
)
GM
Pa
rma
, Oh
io (U
SA
)
Hyu
nd
ai M
on
gtgo
mer
y (U
SA)
1.84
2.53 2.6 2.6
6 3.07
3.09 3.1
9
3.32 3.4
5
3.46
0
1
2
3
4
Ch
rysl
er
Du
nd
ee
GE
MA
(US
A)
GM
Sp
rin
g H
ill (
US
A)
Toy
ota
Ge
org
eto
wn
(U
SA
)
Toy
ota
We
st V
irg
inia
(U
SA
)
GM
Fli
nt
So
uth
(US
A)
GM
Flit
No
rth
(USA
)
GM
To
na
wa
nd
a (U
SA
)
Ch
rysl
er
Ma
ck A
v. II
(U
SA
)
Ch
rysl
er
Sa
ltill
o (M
exi
co)
GM
Ro
mu
lus
(USA
)
Mexico has developed high performance plants that can be compared with the best plants worldwide.
27
Top 10: Engine production (Hours per produced engine)
Source: Oliver Wyman Automotive Consulting Services. The Harbor Report, June 2008. Note: Considers 61 Plants in North America, Europe y South America in 36 cities.
Top 10: Stamping process (Parts per hour)
28
24% 26%
0%
5%
10%
15%
20%
25%
30%
35%
40%
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
México Canadá Alemania Japón
Major exporters of automotive (Participation in the total six first)
Share of the US imports (Percentage)
Source: OMC
Source: US Census Bureau
The results in the automotive sector are evident
• In 2010 the Mexican automotive industry was the largest exporter to the United
States, achieving a share of imports of automotive products in the country of 26%
2008 2009 Change
% %
European Union 53.1 53.8 0.7
Japan 13.9 12.2 -1.7
United States 9.0 8.6 -0.4
Korea 4.0 4.4 0.4
Mexico 3.8 4.3 0.5
Canada 4.2 4.0 -0.2
Other 12.0 12.7 0.7
Mexico Canada Germany Japan
29
A good example in the automotive sector is Nissan, a successful firm in Mexico
Nissan's main markets in 2010 (%)
Source: Based on information from Ward´s Auto.
Nissan Mexico Suppliers' share, 2004-2008
(%)
1. Solid economic fundamentals
2. Strong manufacturing platform for exports
3. Attractive domestic market
4. Industrial policy agenda
5. Concluding remarks
Why Mexico? Why now?
1. The Mexican economy has been recovering fast from the 2009 crisis and is expected to perform favorably during 2011.
2. Mexico has shown responsible macroeconomic policy and has strengthen the domestic market and its growth potential.
3. The rapid growth of exports, their diversification and the increase in our market share of the US market reveal the competitiveness of the Mexican industry.
4. Mexican government is implementing actions to consolidate our industry and to further increase its productivity.
Concluding remarks
The Mexican Economy and
Investment Opportunities
Lorenza Martínez Trigueros
August, 2011
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