REPORT - MEXICO Part one

A five-year vision for expansion

Conservative President Felipe Calderon, leader of the National Action Party, with former president Vicente Fox, left, and Congress Speaker, now Mexico’s Ambassador to Spain, Jorge Zermeño, right, being sworn into office on December 1, 2006.

Mexico’s economy is undergoing a tough transition stage in its history, where the year-old administration of President Calderón is working hard to build on the groundwork laid by former presidents, Vicente Fox and Ernesto Zedillo. With inflation, interest and exchange rates largely under control, the aim now is to increase competitiveness, in order to firmly position the country’s economy amongst the world’s top performers.

In 2006, Latin America received only 8 percent of global FDI, the second worst performance in 15 years. Mexico has been the better performer over the last few years, maintaining its lead in FDI levels over regional competitors: 2006 ended with $18.9 billion flowing into the country, positioning it 4th worldwide amongst emerging economies, following China, Russia and Turkey. Evidently this is not enough. Estimated GDP growth for 2007 is barely above 3.5 percent, and expectations have been lowered due to the anticipated deceleration in the U.S. Mr. Gómez Pimienta, chairman and CEO of FONDO MEXICO, a closed-end investment manager that invests primarily in equity securities on the Mexican Stock Exchange, notes, “For Mexico to grow its GDP between 3 and 4.5 percent is ridiculous; we need to expand the economy at levels of 6, 7 or 8 percent. With the proximity of our neighbour to the north, we should be able to put a much more efficient economic apparatus in place, resulting in the expansion of the economy and much higher rates of growth.”

This “economic apparatus”, to a large extent, refers to the sensitive structural reforms that urgently need to be implemented in three vital areas: energy, fiscal and labor markets. Serious steps have been taken, such as the implementation of the long-awaited ISSTE (National Insurance Institute for Civil Servants) reform earlier this year, and fiscal reform currently being debated in Congress, although much work remains to be done.

During the presentation of the five-year National Development Strategy for 2007-2012 in June this year, the Minister of Economy, Eduardo Sojo, stated that, in addition to reforms, four sectors in particular should underpin growth: infrastructure, tourism, social housing construction and agriculture.

During the President’s recent trip to Europe, he avidly promoted Mexico as a leading logistics platform. However, competitiveness of the country’s infrastructure has dropped considerably in recent years and only 1.5 percent of GDP is spent on the sector. On 19th July 2007, the government officially announced its National Strategy for Infrastructure Development. Planned expenditure for 2007-2012 will equal MXN 2.5 trillion (approx. $232 billion), a figure 50 percent higher than in Mr. Fox’s previous six years. Around 45 percent of total funding will be private sector-sourced through different types of schemes. The UK-inspired PPPs are a tool that is forecast to strengthen regional development. Regulatory obstacles and regional legal disparities are limiting factors on the success of such instruments, although Mr. Hank Gonzalez, CEO of financial group Interacciones, a pioneer in the promotion of PPPs on a municipal and state level, highlights that an increasing number of entities are implementing the necessary changes, following the examples set by the states of San Luis Potosí, Mexico, Aguascalientes and Michoacán.

Infrastructure development is also perceived as a way to address regional inequalities that formed the basis behind the uprisings and protests during election time in 2006. Mexico’s currently well-capitalised banking market has stated that it is prepared to make up to $65 billion available to the sector for this period. “The rhythm of projects has been understandably slow this year, although we expect a significant acceleration as of 2008,” explains Enrique Castillo, recently elected president of the Mexican Banking Association and CEO of IXE Financial Group.

Overall, the feeling is one of optimism and inspiration, although the coming months will be critical in ascertaining tangible results. “It will be a coordinated and comprehensive effort,” explains Luis Téllez, Secretary for Communications and Transportation. “Mexico will be able to target a first rate national infrastructure. We won’t have German infrastructure by the end of 2012, but we will be heading in that direction.”