eep final report (2)

8/7/2019 EEP final report (2)

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Project Report

For

Economic Environment and Policy (EEP)

Project Title: Assessing opportunities for investment in an emerging economy.

(MEXICO)

Made by:

Meghna Khandelwal

Sagar Talreja

Shilpi Tiwari

Shivani Dhir

Vibhor Fatehpuria

Yogesh Behl

Rahil Puri

Yatish Singla

Dipesh Bhandari


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INTRODUCTION


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Developing countryis a term generally used to describe a nation with a low level of

material well-being.The development of a country is measured with statistical indexes

such as income per capita (per person) (GDP), life expectancy, the rate of literacy, etc.

Developing countries are in general countries which have not achieved a significant

degree of industrialization relative to their populations, and which have, in most cases a

medium to low standard of living. There is a strong correlation between low income and

high population growth.

The 12 pillars of Competitiveness

BasicRequirements

Institutions

Infrastructure

Macroeconomic

stability Health and

primary education

EfficiencyEnhancers

Higher educationand training

Goods market

efficiency Labor market

efficiency

Financial marketsophistication

Technologicalreadiness

Market size

Innovation andSophistication

Factors

Businesssophistication

Innovation

Key for

Factor Driven

Economies

Key for

Efficiency Driven

Economies

Key for

Innovation Driven

Economies


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Mexico officially known as the United Mexican States is a federal constitutional

republic in North America. It is bordered on the north by the United States; on the south

and west by the Pacific Ocean; on the southeast by Guatemala, Belize, and

the Caribbean Sea; and on the east by the Gulf of Mexico. The economy ofMexico is

the 11th largest in the world. After rapid economic, social and technological growth

beginning in the 1990s, Mexico is now both one of the world's largest economies and

one of the fastest growing economies in the world, with a stable growth rate of

7.6%. Since the 1994 crisis, administrations have improved the

country's macroeconomic fundamentals.

GDP annual average growth for the period of 19952002 was 5.1%.The international

economic downturn also caused a similar pattern in Mexico, from which it recovered to

grow 4.1% in 2005. The global economic recession that began in late 2008 had a

noticeable effect in the country: in 2007 the economy grew by 7.1%, only to contract by

6.9% in 2008. However, in 2009 Mexico began to recover maintaining a 7.6% growth

rate from 2009-2010 making Mexico's economy one of the fastest expanding in the

world with rate comparable to China, Brazil and India. Inflation has reached a record low

of 3.3% in 2005, and interest rates are low, which have spurred credit-consumption in

the middle class. Mexico has experienced in the last decade monetary stability: the

budget deficit was further reduced and foreign debt was decreased to less than 20% of

GDP.

Economy ofMexico

Aspects of Mexican economy

Rank 11th

Currency Mexican peso (MXN, $)

Fiscal year Calendar


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Statistics

GDP $1.463 Trillion (2009)

GDP growth 7.6%. (2010)

GDP per capita $14,932 (2009 est.)

GDP by sector Agriculture: 4%, Industry: 26.6%,Services: 69.5% (2007 est.)

Inflation (CPI) 2.88% (Central bank report for February 2009)

Population

Belowpoverty line

4.8% using international UN-based definition of poverty

Labor force 46.2 million (2009 est.)

Labor force

by occupation

Agriculture: 13%, Industry: 29%, Services: 58% (2003)

Unemployment 5.5% plus considerable underemployment (21%) (2009 est.)

Main industries Food and Beverages, Aerospace,Electronics, Tobacco, chemicals,Iron and Steel,

Petroleum,Biotechnology, Mining,Shipbuilding, Electricity, Defense

Products, Textiles, Clothing, Motor vehicles, Computers, consumer

durables, Information Technologies, Tourism and Ecotourism

External

Exports $229.8 billion f.o.b. (2009 est.)

Export goods Manufactured goods, electronics, automobiles, oil and oil products, aircraft,

silver, computers and servers, fruits, meats, consumer electronics, processed

foods, vegetables, ships, coffee, LCD screens, electricity, biotechnology, cotton,

rolling stock, automotive and aircraft engines, cellular phones, metals, industrial

equipment, granite and marble, lithium, batteries, firearms, aluminum,


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information technologies, foodstuffs, silicone, medical technology, gold, plastics,

Main export partners United States 49.2%, Germany 15%, South Korea 12.5% China 10.3% Chile 8.4%

(2008)

Imports $234.4 billion f.o.b. (2009 est.)

Main import partners United States 56.7%,,China 9.35%,,South Korea 5.21%,

Japan 4.1% (2009)

Public finances

Public debt 39.1% of GDP (2009 est.)

Revenues $208.5 billion (2009)

Expenses $228.6 billion (2009 est.)

Economic aid $189.4 million (2008)

Mexico has a free market mixed economy, and had been established as an upper

middle-income country since the mid-1980s but in 2009 Mexico surpassed the world

bank's high income economic threshold to become a high income country and is one of

the five high-income countries of Latin America the others being Chile, Argentina,

Uruguay and Panama. It is the 11th largest economy in the world as measured in gross

domestic product in purchasing.


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OBJECTIVE OF

THE STUDY


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y To analyze the various economic variables that affects the performance of an

emerging economy.

y To apply the various concepts learn in real application.

y To enhance the analytical skills and making recommendations.

y The stable growth of Mexicos political and economic environment provides

security as an emerging market.

y It is country of huge potential which for past decade has followed sound

economic policies which delivers solid growth and stable inflation. The analysts

have predicted that by 2040 its economy will be larger than the UKs.

y It is the largest trading nation in Latin America and one of the worlds top 15.

GDP has grown and country has high level of Foreign Direct Investment (FDI).


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FINDINGS


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Mexico has come a long way since the lost decade of the 1980s and the ensuinginstability associated with recurring financial crises. The country has emerged as thesecond largest economy in Latin America, after Brazil, and as the regions topdestination for Foreign Direct Investment (FDI) in 2006. Since the 1995 Tequila crisisthat rocked the countrys financial and exchange markets; Mexico has made significant

progress toward establishing a solid macroeconomic foundation for sustained growth. Itadopted an effective stabilization program that included the restructuring of its externaldebt, a prudent monetary policy, and a flexible exchange rate.

Mexico does not display the same dynamism in terms of growth rates as other leadingemerging markets such as India and China. Annual GDP growth rates in Mexicoaveraged 2.8% from 2002 to 2006, unimpressive compared to 10.1% and 7.8% forChina and India, respectively, for the same period. Mexicos economy continues toappear particularly vulnerable to external downturns, given its close association with theUS business cycle and the heavy dependence on oil revenues to fund the public sector.The slowdown of the US economy sparked by the recent sub-prime mortgage crisis will

likely stunt Mexicos growth, now forecast at 1.9% for 2008 and 3% for 2009.

MACROECONOMICENVIRONMENT

Transparent institutions, a sound macroeconomic environment, well-developedinfrastructure and a healthy and literate workforce are basic requirements for nationalcompetitiveness. They play a crucial role for factor-driven economies but are also veryimportant for efficiency-driven economies.

Macroeconomic stability

Strong macroeconomic fundamentals are a necessary condition for well-functioning andprosperous economies. They provide a sound environment in which businesses canoperate and generate wealth.Mexico is clearly delivering a convincing performance on this score in recent years. Thisis especially significant given the countrys recent history of cyclical financial crises thatcoincided with the end of each six year presidential term. Several factors have helpedMexico achieve an investment grade macroeconomic environment single digitinflation, controlled by a constitutionally independent Central Bank; prudent fiscal policy,coupled with a flexible exchange rate regime, adopted following the Tequila crisis; thereduction of the government debt to a manageable level (20% of GDP); and efforts to

change the debt profile from external to internal and from short-term to longer-termmaturities.


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Market size

A sufficiently large market is central to improving productivity. It allows firms to benefitfrom economies of scale, in turn encouraging them to invest in research anddevelopment (R&D), innovate and constantly improve their production processes.In terms of domestic market, Mexicos population is over 100 million, and purchasingpower is growing.


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Recently attained macroeconomic stability, stronger growth, expanding credit, andsocial programs for the poor have contributed to a marked reduction in the percentageof Mexicans under the poverty line (from 37% in 1996 to 14% in 2006) and theemergence of a more robust middle class.The size of Mexicos foreign market is boosted by its extensive network of free trade

agreements. Mexico is a world leader in signing such pacts. NAFT

A has providedMexico with free access to its main market, the United States.


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Financial market sophistication

Development of the financial system contributes to economic growth by reducing thecosts of acquiring and processing information, helping investors diversify risks, andreducing monitoring costs. As a consequence, it improves resource allocation. In the

absence of intermediaries, economic agents would have to assume the large cost ofevaluating every business, firm, manager, sector and whatnot before deciding where toput their savings. The financial market sophistication pillar gauges the sophisticationand efficiency of the financial system and its soundness and trustworthiness. It analysesvariables such as the ease of obtaining bank loans, the soundness of banks, the easeof raising money on the local stock market, and the availability of venture capital. Withan overall mark of 4.28, Mexico ranked 67th on this pillar, just above the Latin Americanaverage (4.19). Mexico lagged over 40 positions behind the best country in the sample.

Mexicos financial system has been recovering from the endemic fragility of the pastcaused by macroeconomic instability and recurring financial crises. Several factors have

contributed to the soundness and profitability of the banking sector since the Tequilacrisis: important changes in oversight, consolidation and more openness to foreigninvestment.

Small and medium enterprises and consumers still find it difficult to obtain capital, a fact

highlighted by Mexicos low marks for the ease of access to loans (88th), venture capital

availability (86th) and financing through the equity markets (68th).


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Technological readiness

In todays globalized world, technology has increasingly become an essential elementfor firms that hope to compete and prosper. Technology is important for low-income anddeveloped economies alike, but what really matters for countries like Mexico is the

availability of knowledge - no matter what the source.

At its current stage of development, Mexico does not need to generate knowledge tocontinue to grow. It can still benefit from the integration of foreign technology in itsproduction processes and everyday life. Mexico ranked 41st for the variable on FDI andtechnology transfer. But despite considerable incoming FDI flows (see Figure 12 below)associated with at least some technology transfer, the country does not appear to havefully taken advantage of an impressive set of competitive advantages that include aunique geographic location and the young labor force to insert itself into the globalknowledge-based value chain.


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abor market efficiency

Flexible labor markets ensure that the workforce is allocated as efficiently as possible.They are critical to improving competitiveness in all economies. This is even more so forcountries that are competing mainly on high value added goods in dynamic markets that

require continuous adjustments in national production systems; the labor market mustbe flexible enough to allow workers to gravitate to whatever the key sectors are at agiven time.Well-functioning labor markets can also help reduce poverty and foster social equality.This is especially true for countries such as Mexico that are characterized by veryunequal income distribution and widespread hardship.With a score of 4.09, Mexico is ranked a disappointingly low 92nd for labor marketefficiency, by far the worst assessment among the 12 pillars of competitiveness.

Conclusions

Mexico has made progress in t the last few decades or so and created strongfoundation for sustained competitiveness. At the same time, it has not been shy aboutpointing out short comings and challenges.

The country has broken free from endemic macroeconomic instability. It has madeimpressive strides toward opening, liberalizing and improving the efficiency of itseconomy. It has also diversified its economy. Yet a number of important weaknessesremain in key areas.

Mexico also continues to display serious shortcomings in some of the basicrequirements of competitiveness. The quality of its institutions is worrisome. The list ofproblems is long: poor public governance, rampant corruption, low levels of citizen trustin politicians, widespread red-tape and government inefficiency, an onerous tax systemwith a small tax base, and an inefficient legal framework.

At the same time, Mexico is a country of great potential, with a unique geographicalposition, a young population and a rapidly expanding market. This potential must andcan be fulfilled by a joint effort of all political parties, the business sector and civil societyto address the deficiencies highlighted.Only then can the country take advantage of its diverse competitive advantages andensure sustained growth and enduring prosperity for its citizens.


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RECOMMENDATIONS


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The stable growth of Mexicos political and economic environment has providedincreased security as an emerging market investment location.The stable growth of Mexicos political and economic environment has providedincreased security as an emerging market investment location.An extensive list of reasons can be created as to why ever increasing numbers of

buyers are continuously looking towards Mexico.

1. Stable Economic and Political Environment

In recent years the Mexican government has strived to reform the political environment,creating a strengthened economy and encouraging direct foreign investment. Theavoidance of being heavily reliant upon the construction sector provides increasedstability and ample room for growth in the real estate sector.Unemployment is on the decrease, contributing to the economic growth of the nationover the past decade. Infrastructure reforms across the country have been a focus of asuccession of political integration, creating continuously improving and modern

telecommunication and transport networks.Due to the countrys stable economic environment, the local currency holds strong. Astrengthened currency can assist with determining the economic stability of anemerging market investment environment,

2. EmergingMortgage Market

Following the introduction of Mexicos mortgage market in 2003, the market has grownat an exceptional rate. Decreasing interest rates also assisted with enablingaccessible financing options to the domestic market and foreign investors.Since the establishment of mortgage financing for Mexican real estate, the market has

matured in regards to availability, security and accessibility to a wider market sector.Assisting with the growth of the mortgage market has been the countrys growing middle

class society in a country becoming increasingly modern and attractive to foreign

investment.

3. StrongReal Estate Market Growth

The Mexican government has taken considerable effort to reform the countrys realestate sector for both the domestic market and foreign investors. The domestic marketis continuously growing with the fast expanding middle class society and accessibilityto mortgage financing.


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Sectors/Industries for Investment

With a population of 107 million people, including a large and growing middle class,Mexico is a significant potential consumer market. Mexico is perceived to be a tough

proposition, even for the seasoned exporter, due to high levels of bureaucracy andcomplicated procedures. In fact, doing business in Mexico is no more difficult than inother emerging markets, and in many cases it is much easier. The Government isactively working to reduce bureaucracy and improve competitiveness, and is drivingforward reforms to attract new investment and diversify trade and many of the potentialpitfalls can be avoided with adequate preparation.

AUTOMOTIVE

Mexico is the eleventh largest automotive producer in the world, currently producing justover two million vehicles annually. Mexico has also become the auto parts hub for NorthAmerica.

Key Fact

Mexico is the eleventh largest automotive manufacturer in the world, and the mostimportant manufacturing platform for the Americas.

Business Opportunities

Demand for raw materials used in the manufacture of spare parts and components.

Components (engineered parts for diagnostic and assembly equipment): Brakingsystems, electrical components, transmission and engine components, molded plasticsection, stamped steel parts steering assemblies, interior trims and light weightalternative metals.

CONSUMER GOODS

The Consumer Goods sector in Mexico has grown rapidly over the last five years and

prior to the current global economic downturn, a growing middle class and stableeconomy has seen an increase in demand for imports.

Key Fact

Mexico is the most important luxury-goods market in Latin America and internationalbrands tend to experience rapid growth after entering the Mexican market.


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OIL & GAS

Mexico is the sixth largest oil producer in the world and ranks eighteenth in terms of gasproduction. PEMEX, the State National Oil Company, requires resources to the value ofUS$22 billion per year in Capital Expenditure.

Key Fact

Mexico is the world's sixth largest oil producing country (after China, Saudi Arabia, theRussian Federation, the USA, and Iran) producing approximately 2.7 million barrels perday and has the world's fifteenth largest oil proven reserves.

ICT

Mexican telecommunications is an ever-changing and increasingly profitable market.

The recent proliferation of wireless communications in Mexico has been soextraordinary that the country is now considered one of the regions most promisingmarkets for wireless equipment and services. The IT and software sector is growing fastin Mexico. In 2008 it experienced a growth of 15 per cent. The MexicanGovernment expects to see a further growth of 15 per cent between 2009 and 2013.

Key Fact

The Mexican video games market is the fourth largest market in the world.

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