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Mexico

Mexico

Population 127.6 million
GDP 9,862 US$
B
Country risk assessment
A4
Business Climate
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Synthesis

MAJOR MACRO ECONOMIC INDICATORS

  2018 2019 2020 (e) 2021 (f)
GDP growth (%) 2.2 -0.2 -8.3 5.3
Inflation (yearly average, %) 4.9 3.6 3.4 5.3
Budget balance (% GDP) -2.1 -1.6 -2.9 -2.8
Current account balance (% GDP) -2.1 -0.3 2.4 0.5
Public debt (% GDP) 53.6 53.3 60.6 60.5

(e): Estimate (f): Forecast

STRENGTHS

  • Geographic proximity to the U.S. economy
  • Membership of USMCA and many other agreements
  • Substantial industrial base
  • Free-floating exchange rate
  • Adequate foreign exchange reserves
  • Large population and relatively low labour cost

WEAKNESSES

  • High dependence on the U.S. economy
  • High income disparities and rising criminality
  • High corruption level
  • Weaknesses in transport, health and education
  • Narrow tax base, with tax revenues representing 21% of GDP
  • Oil sector and PEMEX undermined by years of underinvestment
  • High informality in job market

RISK ASSESSMENT

Economic recovery led by base effect and U.S. recovery

Although GDP was still contracting on a year-on-year comparison in Q1 2021 (-2.8% from –4.6% in Q4 2020), it continued to rebound at the margin (0.8% QoQ). Regarding the COVID-19 evolution, in mid-July 2021, the number of new cases were rising from the lows observed in previous month, albeit still far below the January 2021 peak. As of 18 July, the country had 17% of its population fully vaccinated and 30% with at least one shot. Moreover, in June authorities announced the step up of vaccination in frontier cities with the U.S., aiming to roll back restrictions. Since the beginning of the pandemic, border crossings were restricted to essential travel. Looking ahead, the economy is expected to profit from further reopening, as the vaccination process gains strength. Activity should also continue benefiting from stronger U.S. activity, which favours Mexico's manufacturing industry (albeit its automotive sector still struggles with the global supply disruption affecting semiconductors). In addition, remittances have continued to grow in 2021, after the unexpected USD 40 billion record-high (or 3.7% of GDP) reached in 2020. This alongside a gradual job market improvement will bode well for household consumption. Conversely, the recovery could be somewhat limited by the recent rise in inflation, which has led the central bank to increase the policy rate by 25 basis points to 4.25% in June 2021 (new hikes are likely). Risks to downside are related to the new COVID-19 that could foil a full economic reopening. Lastly, controversial economic policies should continue to undermine gross fixed investments.

 

Contracting current account surplus and still moderate fiscal deficit

The 4-quarter rolling current account surplus rose to 2.6% of GDP in Q1 2021, led by the narrowing of primary income deficit (due to lower profit and dividends repatriation by foreign firms) and strong secondary income surplus related to remittances. Contrarily, the trade balance surplus deteriorated in the period due to temporary supply shocks that affected exports (gas shortage in February caused by deep frost in Texas and supply chain disruptions). Moreover, services deficit also widened due to lower tourism revenues in Q1 2021 compared with the same period of the previous year. On the financial side, net foreign direct investment continued to drop in rolling four quarters (to 1.8% of GDP, from 2.3% of GDP in 2020). Furthermore, net portfolio outflow grew to 1.7% of GDP in Q1 2021 (from 1% of GDP in 2020). Regarding the external debt, it reached 42.3% of GDP in Q1 2021 (21.1% of GDP owed by the public sector), up from 37% of GDP at end 2019 (pre COVID-19 level). Overall, Mexico should keep a solid external position supported by foreign currency reserves of, USD 193 billion (covering roughly 5 months of imports), credit line with the IMF and swap line with the U.S. Federal Reserve. Concerning the fiscal account, the government should keep the fiscal discipline during the second half of its mandate. This year, the nominal deficit will remain at a level similar to 2020. While rebounding activity and higher oil prices contributes positively to fiscal revenues, expenditure related to infrastructure projects should also increase.

 

The 2021 mid-term election provided mixed outcomes for the ruling Morena party

On 6 June 2021, the country held midterm elections, when the full Lower House was renewed together with 15 governorships and several local-level seats. The ruling Morena party and its allies failed to achieve the required two thirds majority in the Lower House to pass constitutional changes (such as a possible controversial bill to revert the 2013 energy sector liberalization, which opened the oil and power sectors to private investment). On the other hand, the maintenance of a simple majority will allow the government to keep control of issues such as the budgetary process. Regarding the regional elections, the result strengthened Morena's coalition ahead of the 2024 presidential election, as they won 11 out of the 15 governorships that were at stake and now governs 17 states (50% of the population). Moreover, despite the weaker than expected legislative election outcome, President Obrador announced in mid-July 2021 his plans to send a constitutional reform to Congress to protect public-sector interests over private companies in the electricity market. The aim is that CFE would have a guaranteed 54% participation in electricity generation. It is important to note that, for now the courts have generally ruled against controversial policies affecting the energy sector passed in Congress. Moreover, the ruling power is expected to propose in Q3 2021 a tax reform focused on broadening the tax base and closing loopholes (it would not comprise increases in tax rates).

 

 

Last updated: July 2021

PAYMENT

Debts are commonly paid in Mexico by cheques, wire transfers and – in some special cases – credit cards. Corporate payment processes are governed by companies’ internal policies. Most companies request supporting documentation from the other party before proceeding with a transaction (e.g. the company’s articles of incorporation, or its tax identification, known as the Registro Federal de Contribuyentes). The documents most frequently related to commercial transaction are invoices, promissory notes, and cheques. Promissory notes are unconditional promises, in writing, to pay a person a sum of money. In Mexico, this document is normally used as a guarantee of payment from the buyer. It is signed by the legal representative of the buyer – and hence, the debtor – for an amount which is superior to the total amount of the debt. Promissory notes and cheques also serve as certificates of indebtedness. Once buyers possess the relevant information, they can proceed to make payments by wire transfer or cheque, with both methods taking approximately ten to fifteen working days. Wire transfers are more common, as cheques can be post-dated, thus presenting the risk that buyers will issue cheques that they cannot finance.

 

Debt collection

Invoices

In terms of debt collection, original invoices act as proof of the acceptance of the debt and the establishment of a commercial relationship between the parties. According to commercial and civil laws, the commercial agreement is sealed by two elements: an object (in this case the product or the service), and the price of the object as agreed by the parties. Even in the absence of a written agreement, an invoice provides both of these elements. Invoices are therefore the most effective form of proof in a lawsuit situation, as they show that the parties made a sale agreement and have a reciprocal obligation to pay the price agreed and to deliver the goods or provide the service.

In 2014, the Mexican Tax Authorities (Servicio de Administraci Servicio de Administración Tributaria) ruled that all invoices must be electronic, with an XML file. They must also be verified by the tax authority system in order to be validated. The tax authority also requests electronic confirmation when the creditor receives payment, along with a receipt in an XML file as legal confirmation. These new requirements entered into force in December 2017. The goal of these changes is to limit the amount of fraud cases and ghost companies, both of which are prevalent in Mexico.

 

Amicable phase

Before entering into legal proceedings in Mexico, creditors normally attempt to contact their debtors via telephone. A written letter is sent to the debtor, in which the debtor is notified of the amount of the debt and the creditor’s intentions to negotiate payment terms, other steps include a visit to the debtor by a collection specialist. During this visit, the collection specialist will attempt to develop a more detailed perspective on the debtor’s situation. The specialist will endeavour to ascertain if the company is still in business and if it has assets (such as real estate, merchandise or other rights) that could be seized in the event of a legal process.

When creditors initiate collection actions with an amicable phase, it is common for debtor companies to disappear altogether. This means the discontinuation of commercial activities that could potentially enable the payment of sums due.

When entering into commercial export relationships, companies are advised to ensure that all documentation conforms to Mexican law. A lack of correct information and documentation opens exporters up to the possibility of fraud committed by Mexican companies and reduces the likelihood of successful debt recovery during the amicable phase.

 

Legal proceedings

The Medios Preparatorios a Juicio Ejecutivo Mercantil is a pre-legal process takes place when there is an invoice as a proof of the pending payment and of the commercial relationship. Creditors request that the judge obtains a citation from the debtor or its legal representative. He then obtains the confession and acceptance of debt from the debtor, as well as the pending payment. As the confession before the judge is an executive document, the creditor is then able to initiate the Summary Business Proceeding legal process. This pre-legal process takes approximately two or three months. There are subsequently three types of proceedings that can be initiated against debtors:

 

Summary Business Proceeding

This legal process takes place when there is a Certificate of Indebtedness (promissory notes, cheques or legal confessions before the judge by the debtor or its legal representative). The process begins with the phase of citation, when the creditor initiates the lawsuit by requesting that the debtor pays the total amount of the debt due. If the debtor does not have sufficient funds, the creditor can request that some of its assets be seized. These assets can include real estate, merchandise, bank accounts, industrial property rights and trademarks, to be used as a guarantee against the total amount of the debt. Once the assets are seized as a guarantee of the debt, the legal process continues until the judge renders his final resolution. Then, if there is no negotiation or payment, the creditor can initiate the auction of assets to recover the debt. This legal process takes approximately six to eighteen months, although this can vary from case to case.

 

Ordinary Business Proceeding

Ordinary Business Proceedings are the most time consuming procedure in Mexican commercial law. They can take place in the absence of a Certificate of Indebtedness, which means that the only proof of a commercial sale between the parties is the commercial agreement with invoices. In this type of process, assets can only be seized as a guarantee of the total amount of the debt when the judge has rendered his final sentence condemning the debtor to make payment. This legal process takes approximately one to two years.

 

Oral Proceedings

Oral proceedings take place when the total amount of the debt does not exceed EUR 31,856.68. As with Ordinary Business Proceedings, assets can only be seized as a guarantee of the total amount of the debt when the judge has rendered his final judgment condemning the debtor to pay the amount due. This process takes approximately four to six months. On May 2, 2017, Mexican congress made a modification which ruled that all commercial disputes be processed through Oral Proceedings, with no limitations on amounts, with effect from January 25, 2018.

 

Enforcement of a legal decision

A judgment is enforceable as soon as it becomes final. If the debtor does not comply with the judgment, the creditor can request a mandatory enforcement order from the court, in the form of an attachment order, sale of specific assets, or liquidation of the company. This takes between six months to two years.

Foreign judgments can be enforced through exequatur proceedings. The court will verify that certain requirements are fulfilled, prior to recognising the foreign decision. The court establishes whether the foreign court had jurisdiction to decide on the issue and whether enforcing the decision will not conflict with Mexican law or public policy.

Insolvency proceedings

Out of court proceedings

With the approval of creditors holding 40% of the debt, debtors can constitute a “pre-packaged” reorganisation agreement. This enables the court to issue an insolvency declaration and declare the company in concurso mercantile.

 

Liquidation

Liquidation can only be requested by the debtor itself, but the debtor can be placed into liquidation as a result of its failure to submit an acceptable debt restructuration proposal to its creditors through the concurso mercantile proceedings. A liquidator is appointed and given the responsibility for managing the company, selling its assets and distributing the proceeds to the creditors according to their rank.

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