Economic Analysis
Mexico

Mexico

Population 127.6 million
GDP per capita 9,862 US$
B
Country risk assessment
A4
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Synthesis

MAJOR MACRO ECONOMIC INDICATORS

  2018 2019 2020 (e) 2021 (f)
GDP growth (%) 2.2 -0.1 -9.0 2.5
Inflation (yearly average, %) 4.9 3.6 3.4 3.3
Budget balance (% GDP) -2.1 -1.6 -3.6 -3.5
Current account balance (% GDP) -2.1 -0.3 0.2 0.1
Public debt (% GDP) 53.6 53.7 65.5 65.6

(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
  • Weak sovereign fund

RISK ASSESSMENT

Activity will resume weakly in 2021

COVID-19 strongly affected the economy, leading it into a deep recession. Despite the poor evolution of COVID-19 in the country, the government announced plans to begin the normalization of economic activities in May 2020. However, the gradual reopening was not without mishaps (due to the resurgence of the outbreak), forcing some states to restrict non-essential activities again in November 2020. Because of the negative shock caused by the COVID-19 outbreak and the very limited stimuli measures implemented (0.7% of GDP), Mexico´s GDP was among the most impacted in Latin America. The economy should rebound only partially in 2021. Household consumption is expected to improve, helped by the slow recovery on the job market, a still accommodative monetary policy (a cut of 4 basis points has been implemented since August 2019) and higher remittances from the U.S. (in line with an improvement on the U.S. job market). Concomitantly, the economic resumption in the U.S. will favour Mexican manufacturing exports. Conversely, the poor economic rebound and the government’s controversial policies will prevent gross fixed investments from gaining strong growth momentum. Downside risks are related to the evolution of COVID-19 in the country and in the U.S. Finally, while the recent accession of the Democrat Joe Biden to the U.S. presidency should imply a less aggressive stance on U.S. trade policy, risks will remain. This is underpinned by the fact that his Democratic party may push for stricter compliance or tighter labour and environmental laws within the USCMA agreement.

 

External and public accounts withstood relatively well thanks to low stimuli

The current account deficit switched to a light surplus in 2020, supported by a higher trade surplus, as imports observed a deeper slide than exports (with the U.S. economy recovering faster than that of Mexico), and a lower primary account deficit (due to lower profits registered and repatriated by foreign companies). These movements outpaced the deterioration in services account because of lower tourism. Concomitantly, despite the rise in the U.S. unemployment rate, remittances (equivalent to roughly 3% of GDP in 2019) also proved more resilient than initially expected. In 2021, the current account deficit will remain broadly balanced. The trade balance will remain in surplus and, assuming stronger tourism by the end of 2021, the services deficit could be relatively lower. Additionally, although FDI are likely to increase from the 2020 level, they will remain subdued amid still weak domestic activity and erratic microeconomic policies. Regarding the external debt, its part owed by the public sector reached 21.8% of GDP in September 2020 (from 15.9% in end 2019), while its private part stood at 21.7% of GDP in June 2020 (from 17.4% of GDP in 2019). Finally, foreign exchange reserves stood at USD 200 billion in October 2020, covering over 6 months of imports.

Concerning the public account, the fiscal deficit deteriorated moderately in 2020 due to lower tax revenues because of the deep economic recession. This outcome came in a context of timid fiscal stimuli and with oil hedge smoothing the impact of lower oil prices, as well as drawdowns from rainy-day funds. However, gross public debt as a percentage of GDP registered a strong increase, also affected by a lower base effect (as GDP collapsed). This year, the nominal deficit should remain at a similar level, despite the government’s estimate at 2.9% of GDP (due to its very optimistic GDP growth estimate of 4.6%). The 2021 budget also includes resources for the Mayan train (0.2% of GDP), the new airport serving Mexico city (0.1% of GDP) and capital transfer to PEMEX (0.2% of GDP) to continue with the construction of the Dos Bocas refinery.

 

Corruption scandals can influence the 2021 mid-term election

Corruption is an old ailment that has gained momentum in recent months after Emilio Lozoya, the former boss of the state oil company Pemex during the Enrique Pena Nieto (2012-2018) government, was extradited from Spain in July 2020 to face corruption charges in Mexico. He has been accused of taking bribes from a Brazilian construction firm. In a declaration to prosecutors, Lozoya raised corruption charges against more than a dozen former and current politicians (including three ex-presidents). The most notable case refers to the 2013 energy reform that opened the local oil sector to private companies and of which President Andrés Manuel López Obrador (AMLO) is a fierce critic. President AMLO has tried to capitalize on this corruption scandal to improve the ruling National Regeneration Movement party’s (MORENA) outcome in the June 2021 mid-term elections. Furthermore, if MORENA succeeds in increasing its representation in Congress after the mid-term elections, AMLO may try to roll back the energy reform (a two-thirds majority in Congress is required), hurting investors’ confidence in the economy. In the meantime, AMLO will also have to dodge an obstacle: two videos made public after Lozoya’s accusation allegedly showed his brother, Pío López, receiving illegal campaign financing in 2015. AMLO has denied that the payments his brother received were corrupt, but said that the Attorney General’s Office should investigate them regardless.

 

Last updated: February 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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