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
 Introduction

Developing country is 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.

Key for Key for Key for

Factor Driven Efficiency Driven Innovation Driven

Economies Economies Economies

The 12 pillars of Competitiveness

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 of Mexico 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 1995–2002 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 of Mexico

Aspects of Mexican economy

Rank 11th

Currency Mexican peso (MXN, $)

Fiscal year Calendar

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 4.8% using international UN-based definition of poverty

Below poverty line

Labor force 46.2 million (2009 est.)

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

by occupation

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

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

etroleum,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,
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.
Objective of the
study

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

emerging economy.
 To apply the various concepts learn in real application.
 To enhance the analytical skills and making recommendations.

 The stable growth of Mexico’s political and economic environment provides

security as an emerging market.
 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 UK’s.
 It is the largest trading nation in Latin America and one of the world’s top 15.
GDP has grown and country has high level of Foreign Direct Investment (FDI).
 Findings

Mexico has come a long way since the “lost decade” of the 1980s and the ensuing
instability associated with recurring financial crises. The country has emerged as the
second largest economy in Latin America, after Brazil, and as the region’s top
destination for Foreign Direct Investment (FDI) in 2006. Since the 1995 “Tequila” crisis
that rocked the country’s financial and exchange markets; Mexico has made significant
progress toward establishing a solid macroeconomic foundation for sustained growth. It
adopted an effective stabilization program that included the restructuring of its external
debt, a prudent monetary policy, and a flexible exchange rate.

Mexico does not display the same dynamism in terms of growth rates as other leading
emerging markets such as India and China. Annual GDP growth rates in Mexico
averaged 2.8% from 2002 to 2006, unimpressive compared to 10.1% and 7.8% for
China and India, respectively, for the same period. Mexico’s economy continues to
appear particularly vulnerable to external downturns, given its close association with the
US 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 Mexico’s growth, now forecast at 1.9% for 2008 and 3% for 2009.

MACRO ECONOMIC ENVIRONMENT

Transparent institutions, a sound macroeconomic environment, well-developed
infrastructure and a healthy and literate workforce are basic requirements for national
competitiveness. They play a crucial role for factor-driven economies but are also very
important for efficiency-driven economies.

 Macroeconomic stability
Strong macroeconomic fundamentals are a necessary condition for well-functioning and
prosperous economies. They provide a sound environment in which businesses can
operate and generate wealth.
Mexico is clearly delivering a convincing performance on this score in recent years. This
is especially significant given the country’s recent history of cyclical financial crises that
coincided with the end of each six year presidential term. Several factors have helped
Mexico achieve an “investment grade” macroeconomic environment single digit
inflation, controlled by a constitutionally independent Central Bank; prudent fiscal policy,
coupled with a flexible exchange rate regime, adopted following the “Tequila” crisis; the
reduction 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-term
maturities.
 Market size
A sufficiently large market is central to improving productivity. It allows firms to benefit
from economies of scale, in turn encouraging them to invest in research and
development (R&D), innovate and constantly improve their production processes.
In terms of domestic market, Mexico’s population is over 100 million, and purchasing
power is growing.
Recently attained macroeconomic stability, stronger growth, expanding credit, and
social programs for the poor have contributed to a marked reduction in the percentage
of Mexicans under the poverty line (from 37% in 1996 to 14% in 2006) and the
emergence of a more robust middle class.
The size of Mexico’s foreign market is boosted by its extensive network of free trade
agreements. Mexico is a world leader in signing such pacts. NAFTA has provided
Mexico with free access to its main market, the United States.
 Financial market sophistication

Development of the financial system contributes to economic growth by reducing the

costs of acquiring and processing information, helping investors diversify risks, and
reducing monitoring costs. As a consequence, it improves resource allocation. In the
absence of intermediaries, economic agents would have to assume the large cost of
evaluating every business, firm, manager, sector and whatnot before deciding where to
put their savings. The financial market sophistication pillar gauges the sophistication
and efficiency of the financial system and its soundness and trustworthiness. It analyses
variables such as the ease of obtaining bank loans, the soundness of banks, the ease
of raising money on the local stock market, and the availability of venture capital. With
an overall mark of 4.28, Mexico ranked 67th on this pillar, just above the Latin American
average (4.19). Mexico lagged over 40 positions behind the best country in the sample.

Mexico’s financial system has been recovering from the endemic fragility of the past
caused by macroeconomic instability and recurring financial crises. Several factors have
contributed to the soundness and profitability of the banking sector since the “Tequila”
crisis: important changes in oversight, consolidation and more openness to foreign
investment.

Small and medium enterprises and consumers still find it difficult to obtain capital, a fact
highlighted by Mexico’s low marks for the ease of access to loans (88th), venture capital
availability (86th) and financing through the equity markets (68th).

 Technological readiness

In today’s globalized world, technology has increasingly become an essential element

for firms that hope to compete and prosper. Technology is important for low-income and
developed 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 to
continue to grow. It can still benefit from the integration of foreign technology in its
production processes and everyday life. Mexico ranked 41st for the variable on FDI and
technology transfer. But despite considerable incoming FDI flows (see Figure 12 below)
associated with at least some technology transfer, the country does not appear to have
fully taken advantage of an impressive set of competitive advantages that include a
unique geographic location and the young labor force to insert itself into the global
knowledge-based value chain.

 Labor 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 for
countries that are competing mainly on high value added goods in dynamic markets that
require continuous adjustments in national production systems; the labor market must
be flexible enough to allow workers to gravitate to whatever the key sectors are at a
given 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 very
unequal income distribution and widespread hardship.
With a score of 4.09, Mexico is ranked a disappointingly low 92nd for labor market
efficiency, 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 strong
foundation for sustained competitiveness. At the same time, it has not been shy about
pointing out short comings and challenges.

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

Mexico also continues to display serious shortcomings in some of the basic

requirements of competitiveness. The quality of its institutions is worrisome. The list of
problems is long: poor public governance, rampant corruption, low levels of citizen trust
in politicians, widespread red-tape and government inefficiency, an onerous tax system
with a small tax base, and an inefficient legal framework.

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

The stable growth of Mexico’s political and economic environment has provided
increased security as an emerging market investment location.
The stable growth of Mexico’s political and economic environment has provided
increased 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. The
avoidance of being heavily reliant upon the construction sector provides increased
stability and ample room for growth in the real estate sector.
Unemployment is on the decrease, contributing to the economic growth of the nation
over the past decade. Infrastructure reforms across the country have been a focus of a
succession of political integration, creating continuously improving and modern
telecommunication and transport networks.
Due to the country’s stable economic environment, the local currency holds strong. A
strengthened currency can assist with determining the economic stability of an
emerging market investment environment,

2. Emerging Mortgage Market

Following the introduction of Mexico’s mortgage market in 2003, the market has grown
at an exceptional rate. Decreasing interest rates also assisted with enabling
accessible 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 country’s growing middle
class society in a country becoming increasingly modern and attractive to foreign
investment.

3. Strong Real Estate Market Growth

The Mexican government has taken considerable effort to reform the country’s real
estate sector for both the domestic market and foreign investors. The domestic market
is continuously growing with the fast expanding middle class society and accessibility
to mortgage financing.

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 and
complicated procedures. In fact, doing business in Mexico is no more difficult than in
other emerging markets, and in many cases it is much easier. The Government is
actively working to reduce bureaucracy and improve competitiveness, and is driving
forward reforms to attract new investment and diversify trade and many of the potential
pitfalls can be avoided with adequate preparation.

 AUTOMOTIVE

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

Key Fact

Mexico is the eleventh largest automotive manufacturer in the world, and the most
important 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): Braking

systems, electrical components, transmission and engine components, molded plastic
section, stamped steel parts steering assemblies, interior trims and light weight
alternative 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 stable
economy has seen an increase in demand for imports.

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

 OIL & GAS

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

Key Fact
Mexico is the world's sixth largest oil producing country (after China, Saudi Arabia, the
Russian Federation, the USA, and Iran) producing approximately 2.7 million barrels per
day 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 so
extraordinary that the country is now considered one of the region’s most promising
markets for wireless equipment and services. The IT and software sector is growing fast
in Mexico. In 2008 it experienced a growth of 15 per cent. The Mexican
Government 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.