Economic Analysis
Mexico

Mexico

Population 123.5 million
GDP 9,319 US$
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Country risk assessment
A4
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Synthesis

MAJOR MACRO ECONOMIC INDICATORS

  2016 2017 2018 (e) 2019 (f)
GDP growth (%) 2.9 2.0 2.0 2.0
Inflation (yearly average, %) 2.8 6.0 4.8 3.6
Budget balance (% GDP) -2.5 -1.1 -2.4 -2.2
Current account balance (% GDP) -2.1 -1.6 -1.4 -1.4
Public debt (% GDP) 56.8 54.3 53.8 53.7

(e): Estimate. (f): Forecast.

STRENGTHS

  • Geographic proximity to the United States economy
  • Membership of NAFTA, OECD, the G20 and the Pacific Alliance
  • Substantial industrial base
  • Recent improvement in fiscal position

WEAKNESSES

  • High dependence on the United States economy; vulnerability to changes in the NAFTA agreement
  • High and rising criminality rate and weak income distribution
  • Infrastructure and education weaknesses
  • Oil sector undermined by years of underinvestment

RISK ASSESSMENT

Growth should remain sluggish in 2019

GDP growth in 2018 was predominantly driven by domestic demand, thanks to strong household consumption and the recovery of investments compared to 2017 (positive effects from reconstruction works following the September 2018 earthquake). In 2019, activity should maintain a similar growth rate. On the one hand, steady employment growth, high remittances from Mexicans living abroad, and a still solid demand for manufacturing coming from the United States (despite some GDP growth deceleration expected) should contribute positively to the economy. The USMCA, the new trade agreement made in September 2018 between Canada, the United States and Mexico as a revamp of the NAFTA, eliminates a source of uncertainty. As it includes only modest alterations, the agreement should not hit difficulties during the ratification process in the respective congresses. On the other hand, there are some limits to activity, such as sticky inflation and the depreciation pressures recently reported by the Mexican peso. If the two movements persist along the year, the central bank might not have space to reverse the tightening monetary cycle in place since late 2015. In addition, there are also uncertainties related to the economic direction of the new administration.

 

New government’s commitment to fiscal discipline remains doubtful

The current account deficit has narrowed since 2017, thanks to higher non-oil trade surplus and strong remittances amid a near full employment job market in the United States. This behaviour is expected to remain stable, as oil prices are estimated to continue close to the current levels, and the new USMCA agreement has helped reduce the uncertainties related to the continuity of Mexico’s strong manufacturing exports to the US. Moreover, the current deficit has so far been comfortably covered by FDI. External debt represents around 37% of GDP (45% owed by the government and 49% by the non-financial private sector) and 14% is due in the short term. Reserves in foreign currency equivalent to roughly 15% of GDP (imports coverage of five months) and a two year flexible credit line of USD 74 billion (7% of GDP) with the IMF (due to expire at end 2019) could work as a cushion in the event of a further increase in risk aversion.

The fiscal policy has remained prudent. In contrast to most Latin American economies, Mexico has been able to marginally reduce public debt since 2017. Nevertheless, the main uncertainty for 2019 concerns how the new administration will manage to finance new spending programs promised during campaign (such as increased infrastructure investment, and higher investment for the petroleum SOE Pemex), while maintaining the commitment to fiscal discipline.

 

Corruption and violence are top priorities for the new President

On December 1, 2018, President Andrés Manuel López Obrador (AMLO) from the Morena party took office. His victory followed two unsuccessful presidential bids and represents the end of Mexico’s long-lasting two-party hegemony. AMLO’s success was underpinned by an environment of general dissatisfaction with the political class amid several corruption scandals and climbing violence in the country. Although AMLO was not the financial market’s favourite contender during his previous attempts due to his position against the NAFTA agreement and privatisation, he has since softened his rhetoric. His coalition also assured an absolute majority in the July 2018 general elections – nevertheless, in Mexico, the qualified majority required to pass constitutional changes is two-thirds in both the House and Senate, meaning AMLO is close, but does not have it. Despite a smoother than expected electoral period in 2018 and the market-friendly approach assumed by AMLO since his victory, confidence in the new administration has weakened since mid-October 2018, especially after the construction of the New Airport of Mexico City was cancelled, following a public consultation idealised by the new President. The construction cost was estimated at USD 13 billion, and over a third of the airport has already been built. This episode has raised investors’ fears that the new government might be prepared to tear up other big projects. The energy policy proposed by the ruling party, based on achieving energy self-sufficiency through increasing Mexico’s refining capacity and halting oil exports, also raises concern. At the end of October 2018, rating agency Fitch downgraded its assessment of Pemex to negative watch, citing the increased uncertainty about the company’s future business strategy, which could potentially lead to financial stress. AMLO has pledged to inject USD 11 billion in cash into Pemex in the aim of constructing a new refinery, upgrading Mexico’s six existing refineries and investing in hydroelectric power.

 

Last update : February 2019 

 

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.

 

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.

 

Debt collection

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 which 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 €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 concursomercantile.

 

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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