Economic insights
of Mexico and the world
Index
I. Introductory letter
2
II. Executive summary
3
III. International overview
4
a. Effects in Mexico and the world generated by the election of
Donald Trump
b. Social and economic implications of Brexit in Europe and
throughout the world
c. Syria and the importance of the phenomenon of international
migration
d. China: general situation and effects on the market
e. Consequences of low oil prices in Mexico and the world
IV. National overview
14
a. Social and political perspectives
i.State elections in 2017
ii.Next year’s importance in the 2018 Presidential
elections
iii.Violence in Mexico and its social and market
repercussions
b. Economy
i. Real economy (Employment, GDP, Inflation,
Exchange Rate)
ii. Monetary and fiscal economy
c. Chart of perspectives and general projections for economic
variables in 2017 (exchange rate, inflation, interest rates, GDP
for Mexico and the world)
d. Comments on Mexico’s main productive sectors
V. Challenges, risks, and recommendations
20
Welcome
C.P.C Mauricio Brizuela Arce
Managing Partner
Introductory letter
I am pleased to welcome you to our first issue of our
analysis named “Economic insights – of Mexico and
the world”. We are living moments that will mark the
economic, political and social history in all economies
and global markets. We want to contribute with the
need of timely information and keep our clients and
prospects up to date so they can all make the best
business decisions in front of the changes that will
occur in the next months and years.
In this white paper we will explore general
interest topics, both from an international scope and
relevant to Mexico, such as specific elements of
our economy offering provisions and some possible
recommendations. Many aspects have been discussed
about the impact in Mexico and the world of the new
President in the United States, but there are other
external factors like Brexit, international immigration,
deceleration of China and the volatility of oil prices,
which will be key in the economic performance and the
future of companies.
Internally, in the year 2017 there will be crucial
elections in places like the State of Mexico that could
be preliminary tests to the political future of the country
in 2018, where the country will elect a new president.
The behavior of the main macroeconomic variables of
the Mexican economy is a necessary exercise to
mitigate the risks of possible challenging scenarios.
Herein, we will offer views of our specialists as they
foresee their performance in the next year. The most
relevant productive sectors in our economy will also be
analyzed, since some of them could offer opportunities
even in challenging contexts.
We hope that with our “Economic insights – of
Mexico and the world” report you can inform yourself
rapidly about the main global and Mexican events. We
will issue this white paper quarterly, trying to add value
and support you in your business decisions.
2016 was a year of historical changes and even
some setbacks to protectionist policies; we hope that
2017 becomes a year in which Mexican companies,
those with operations in the country and our economy
achieve prosperity and growth.
We are living moments that will mark the
economic, political and social history in all
economies and global markets.
Executive summary
The year 2016 could be defined by the impact of major political, social, and
economic events. It was a year that many believed to represent significant
processes of change at both the national and international levels changes that
generated a setting of uncertainty in international economies, financial markets,
and the business world.
What many people considered
“givens” did not move beyond
assumptions, since the reality of
2016 was different.
The results of events like Brexit
or the US presidential election
were opposite of what the polls
had claimed, even the day before
the vote. An understanding of the
causes and effects of such events
is fundamental for making correct
decisions.
the political parties’ launching of
their candidates’ campaigns prior to
the Presidential election of 2018.
The combination of internal and
external factors will lead to various
effects in Mexico’s productive
sectors and society; thus, a correct
understanding of these factors
will be a necessity for business
decision-makers.
External events like Donald
Trump’s victory, the deceleration of
China, the vote in favor of Brexit,
the fall and slow recovery of oil
prices, and the major movements
of international migration not only
characterized 2016 but will also be
determining factors in 2017.
The current document seeks to
present a series of
recommendations based on the
studies and analyses of the team
at Salles Sainz Grant Thornton,
applied to the business world and
reality in Mexico in 2017. This
publication also seeks to determine
the greatest risks to be faced,
along with ideas for transforming
these risks into opportunities and
preparing for the major challenges
to come.
As 2017 moves forward, the
effects of such situations will be
felt in the business world. Issues
will include the increased cost of
imported goods as a consequence
of the exchange rate or the rising
inflation experienced in Mexico
during the last part of 2016.
In addition to the abovementioned international events,
Mexico will witness gubernatorial
elections in important states such
as the State of Mexico, as well as
ECONOMIC INSIGHTS OF MEXICO AND THE WORLD
3
International overview
Effects in Mexico and the world
generated by the election of
Donald Trump
The most important political and media event of 2016 was probably the
long and untraditional electoral year in the United States, culminating in the
unexpected victory of Republican candidate Donald Trump, set to take office
January 20, 2017.
The Republican candidate’s
campaign was based on the
concept “Make America Great
Again”, with promises of change
in the nation’s economic, social,
and foreign policies in order to
attain better living conditions for
US citizens. The arguments used
were controversial, however, and
frequently opposite to established
rules; unreasonable campaign
discourse and actions would alter
interaction with various social,
ethnic, and political groups
around the world. Some examples
are:
• The clear threat of the Islamic
State (extrapolated to all Muslims)
for the United States.
• The labeling of Latinos, and
especially of Mexican citizens,
as undesirable immigrants who
reduce job opportunities for US
citizens.
• The tapping into many US citizens’
disagreement with current
government programs, such
as the Obamacare health care
program.
• “America for Americans” or the
idea that wealth generated within
US borders should not be shared
with other nations.
The Republican candidate’s
proposals echoed among the
US population, especially as
communities desired better
living conditions and interpreted
globalization and migration as
obstacles to that goal.
The US electoral system
permitted Donald Trump’s victory
in spite of his failure to win the
popular vote (47.8% for Hillary
Clinton versus 47.3% for Donald
Trump). The US society is divided,
and actions to favor greater social
cohesion will be necessary.
The unexpected election results
were reflected in immediate
reactions in the stock markets of
various nations. Mexico’s Bolsa
Mexicana de Valores (BMV), for
example, fell approximately 2.56%
while the exchange rate went from
18.5089 pesos/USD to 19.9259
pesos/USD, undesirable but
expected. If one takes into account
that average estimates spoke of
decreases from 3.5% to 4.5% in
BMV indexes and an exchange
rate at 23 pesos/USD, the effects
seem to have been less dramatic
than anticipated. The compulsory
question regards the degree of the
US election explains the instability in
Mexico’s exchange rate in 2016.
ECONOMIC INSIGHTS OF MEXICO AND THE WORLD
The Republican candidate’s
campaign was based on
the concept “Make America
Great Again”, with promises
of change in the nation’s
economic, social, and foreign
policies in order to attain
better living conditions for US
citizens.
4
International overview
Although the campaign promises and expectations may
indicate a complicated setting in Mexico’s relations with
its northern neighbor, it is also important to consider the
solidity the Mexican economy has shown in recent times.
Financial markets will continue to
show erratic, reactive movements.
They will tend to stabilize, however,
to the degree that new international
tendencies begin to permeate into
societies and nations as they take
the necessary steps for adjustment.
Acting with caution and using
solid data will prevent irrational
or tempestuous actions in times
of instability in general economic
variables.
The campaign promises that
Donald Trump waved like flags seem
to confirm an orientation toward
economic policy that would return
to trade protectionism. They also
attempt to prevent the population’s
natural migration in search of
improved living conditions; yet
at the same time, they arouse
feelings of racism and xenophobia
that contribute little to improved
interaction among citizens.
The reorganization of the world’s
economic and geopolitical forces
seems to be another possible factor
of influence in the near future,
and the map of international trade
alliances will most certainly change
in upcoming years.
President-elect Donald Trump
has remained loyal to the style
of his campaign. The cabinet
members who will accompany
him in office are a reflection of his
desire to enforce and comply with
his campaign promises. If they
become a reality, the ideas that will
have most of an international effect
include:
• Refusal to participate in TPP
(Trans-Pacific Partnership
Agreement).
• Renegotiation of the North
American Free Trade Agreement
(NAFTA), in a search for better
trade and employment conditions
for US citizens.
• Not only NAFTA will be reviewed;
all nations that trade with the
United States should be prepared
for the protectionist policies of the
new Republican president.
• Important limitations on
immigration into the United States.
• New taxes on the money transfers
immigrants make to their country
of origin as remittances.
• Redefinition of NATO agreements
regarding economic contributions
to the institution.
The above scenarios, based on
Donald Trump’s campaign promises,
will have a significant impact on
a large number of countries. The
following will have a direct effect on
Mexico:
• Both the World Bank and the
International Monetary Fund
expect the United States to raise
ECONOMIC INSIGHTS OF MEXICO AND THE WORLD
interest rates; interest rates in
Mexico will be affected to the
same degree.
• In spite of having been an
extremely charismatic president
supported by the minorities,
Barack Obama was the US
president to have deported the
most undocumented immigrants:
2.8 million. Donald Trump has
made clear that illegal immigrants
will be one of the main focuses
of his administration; thus the
number of deportations is
expected to increase during the
next four years.
• Lastly, since the nation is
expected to levy taxes on money
transfers to Mexico, the total
amount of remittances will not
reach the 2016 figure of 26 billion
dollars.
It is evident that the new political
conformation in the United States will
have consequences around the globe.
And Mexico’s geographical proximity
and extensive trade relationship will
amplify, for better or for worse, the
possible effects of any measures
taken by its northern neighbor. While
both positive and negative opinions
exist, it will be the involved actors’
ability and talent that will enable living
conditions to improve for the citizens
of both nations.
5
International overview
Social and economic
implications of Brexit in Europe
and throughout the world
Although voting has concluded with regard to the United Kingdom’s presence
in the European Union, little follow-up has occurred. The decision is currently
being analyzed by Britain’s Supreme Court, and could be revoked in the event
of certain conditions.
It is important to remember that the
decision made by the British people
on the referendum was a
combination of the following factors:
• The free movement of individuals
and the presence of refugees from
nations in crisis represent greater
competition for British citizens in
obtaining well-paid work.
• National security is lower as a
result of the free movement of
individuals. The situation has
become more serious because of
the recent issues with terrorism in
various parts of the world.
• All nations that form part of the
European Union must contribute
a periodical amount. The United
Kingdom contributes more than
any other member (according to
information from the European
Commission). Such amounts have
been used to provide support and
financing to nations in crisis, and
not necessarily to British citizens.
Independent of any
determination made in the
upcoming months, British voters
chose on June 23, 2016, to leave
the European Union, with effects
that are already becoming
apparent.
According to the indicators
of business optimism in Grant
Thornton’s International Business
Report, which is based on a series
of quarterly surveys of major
corporations in 36 world economies,
the countries most affected by the
Brexit vote were the following:
• Ireland -24%
• United Kingdom -19%
• Spain -19%
• France -18%
The above percentages show
that prevailing uncertainty in Europe
creates doubts among business
leaders, with probable effects
on the possibilities of conducting
business in these nations. On the
other hand, the only sector that has
seen increased optimism regarding
the future is British exporters,
which expect to generate more
transactions as a consequence of
the cheaper pound.
Exiting the European Union is a
decision not limited to economic and
business consequences, as it also
implies a weighty social burden.
ECONOMIC INSIGHTS OF MEXICO AND THE WORLD
6
International overview
Closing the borders to the free
movement of citizens between the
European Union and Britain is more
than a question of passports. The
decision has nationalistic and even
xenophobic connotations.
Closing the borders to the
free movement of citizens
between the European Union
and Britain is more than a
question of passports. The
decision has nationalistic
and even xenophobic
connotations.
The problem takes on strength
as the marked movements of
international migration are analyzed;
in many cases, the destinations are
European nations. The United
Kingdom has received immigrants
for many years, and the results that
British citizens have observed were
one of the primary motivators of the
Brexit vote.
Although exiting or remaining in
the European Union can represent
differences, the British people
showed the world that established
structures can be easily modified if
people perceive needs or incentives
as appropriate at a specific time.
ECONOMIC INSIGHTS OF MEXICO AND THE WORLD
The vote was mid-year proof of
incipient protectionist trends in
developed economies.
Various European nations and
provinces have been characterized
by their separatist feelings. Thus
discussion and argument revolving
around Brexit may be the detonator
for concrete measures. Although
the referendum may be reversed,
it is also possible that a domino
effect could occur in other countries,
whether by calling referendums on
remaining in the European Union or
seeking independence from current
governments; the most notorious
examples of the latter are Catalonia
and Scotland.
7
International overview
Syria and the importance of the
phenomenon of international
migration
As mentioned in the above sections on Donald Trump and Brexit, the world is
moving toward protectionist stances that have the purpose of minimizing the
effects of globalization; nonetheless, one of the most representative factors
of 2016 has been migration around the world, and the measures taken by the
receiving nations.
During the entire year, Syria has
been the subject of widespread
complaints and protests
throughout the world. The nation
has suffered from four years of
civil war, with significant effects on
its population and that of other
countries.
The conflict in Syria is due to
various reasons, of which the
following are the most notable:
• The conflict is based on
economic, social, and religious
problems. Unemployment, political
repression, and disagreement
among Muslim currents in the
nation have led to a series of
uprisings, which the government
has repressed in violent form. A
group of protesters has grown
and has overtaken areas of the
country to become an opposing
group with sufficient human
resources to challenge the
government.
• Both Russia and the United States
have shown their interest in the
conflict by backing different
factions. The Russians support
the Syrian government due to
the important source of income
represented by its weapon
purchases. The United States, on
the other hand, has supported the
rebel groups since they believe
that Bashar al Asad is responsible
for the conflict.
• Lastly, the Islamic State, formed
by a combination of various
terrorist groups and the members
of opposing extremists, has been
hostile to the Syrian government
and even toward the moderate
opposition. Both the United States
and Russia believe that eliminating
this group has priority over any
other issue in the conflict.
The crisis has lasted
approximately four years, has
resulted in 250,000 deaths,
according to the UN, and has
caused approximately 5 million
people to flee from the nation.
Although the media have focused
their attention on the European
powers that have accepted
The nation has suffered from
four years of civil war, with
significant effects on its
population and that of other
countries.
ECONOMIC INSIGHTS OF MEXICO AND THE WORLD
8
International overview
The search for improved economic opportunities is the
main motivator for migrants to go to another country.
Family or personal economy is also the reason of the
primary corridor for international migration between Mexico
and the United States.
refugees, often unwillingly, the
nations that have received the
largest number are Turkey,
Lebanon, and Jordan.
The number of refugees
sheltered in these three neighboring
nations is close to 3.7 million. To
put the number into perspective,
the estimate is that one-fourth of
Lebanon’s total population is of
Syrian origin.
The logical consequences
of such a large population
increase in such a short time are
reduced employment, increased
expenditures for importing food,
and decreased security: a formula
that represents more problems
than opportunities for the average
citizen.
Yet it should not be forgotten
that an armed conflict is only one
of many possible reasons behind
migration.
The search for improved
economic opportunities is the main
motivator for migrants to go to
another country. Family or personal
economy is also the reason of the
primary corridor for international
migration between Mexico and the
United States.
In contrast with the Syrian case,
migration to the United States has
been occurring for more than 30
years; thus the short-term effects
are not as noticeable as in the
Middle East and Europe. Since in
most cases, the migrant’s intent
is to find employment, wages are
pushed down in the receiving nation
and cultural as well as technological
exchanges are encouraged.
Given that many migrants send
money to their family members in
their country of origin, remittances
become primary support for
numerous families and have
important effects on the home
nation’s economy. In Mexico, for
example, remittances during 2016
were approximately 26 billion
dollars—a pillar of the Mexican
economy.
International trends toward
protectionism and xenophobia may
have a strong impact in 2017,
especially since Brexit and the US
elections in 2016 revealed that a
majority of United States and British
voters want to limit entry into their
nation.
The Mexican government will
have the fundamental task of
developing a clear plan of action in
ECONOMIC INSIGHTS OF MEXICO AND THE WORLD
the event that Donald Trump carries
out massive deportations; Mexico’s
sole objective must be to prevent
problems of the type that are
currently affecting Turkey, Lebanon,
and Jordan.
A report was issued in the month
of October that the American
government had placed a restriction
on the number of Haitians who
would be allowed to enter the US
through Mexico’s northern border.
While Haitian migration is the result
of the nation’s economic and social
difficulties in recovering from the
earthquake of 2010, the problem
is expected to continue in 2017,
with approximately 25,000 Haitians
attempting to cross from Mexico
into the United States.
The state of Baja California has
declared a state of emergency due
to the large number of migrants
who have remained stranded as a
consequence of border restrictions
(5300 migrants). The situation
can be expected to worsen when
Trump starts building “the wall” and
implements greater restrictions on
Latin American immigrants; thus the
Mexican government’s contingency
plans must be in place in early
2017.
9
International overview
China - general situation
and effects on the market
A common characteristic of the macroeconomic topics covered in this
publication is the domino effect generated by globalization. If a major power
has problems, both industrialized and developing nations are affected, to
varying degrees.
During recent years, the world has
witnessed several instances of
such a domino effect. The initial
belief may be that no logic or
direct cause distinguishes this type
of situations. The question may be
why the Greek crisis caused Latin
American stock markets to fall or
why the United Kingdom’s exit from
the European Union shook almost
all of the world’s stock exchanges.
Since late 2015 and early 2016,
the world has been experiencing a
similar phenomenon. Economists in
the United Nations and International
Monetary Fund have referred to it
as a major concern.
China’s deceleration implied
that its sustained growth of
more than 10%, from 2010 to
2014, was not going to be an
attainable goal in the following
years. Variables such as
imports began to decrease as
the population’s consumption
slowed.
China’s economy began to
slow down in late 2015, causing
red lights to appear around the
globe because of the serious
implications.
The initial effect observed
was decreasing value in world
markets as a consequence of
speculation; the Chinese yuan lost
approximately 10% of its value
versus the US dollar.
China’s deceleration implied that
its sustained growth of more than
10%, from 2010 to 2014, was not
going to be an attainable goal in
the following years. Variables such
as imports began to decrease
as the population’s consumption
slowed.
The problem with the above
situation is that China has
approximately 20% of the total
world population, and is thus the
globe’s greatest consumer of
food and energy. Countries like
Colombia, Brazil, and Venezuela
that view China as a main trading
partner were some of the firsts to
feel the effects.
ECONOMIC INSIGHTS OF MEXICO AND THE WORLD
10
International overview
The previously mentioned
economic indicators caused the
rest of the world to question if
China’s growth was sustainable. As
a result, various recent analyses
have been made of the situation.
According to the Bank of
International Settlements, the
existing gap between China’s
GDP and credit is 30.1%. The
conclusion is that the nation’s high
growth during past years may be
the result of careless borrowing
and the creation of a credit bubble.
Knowing that China, along with
the United States, is one of the
world’s greatest consumers, and
since China’s situation is especially
sensitive because of the high level
of globalization, the world must
be attentive to the progress of
indicators in 2017.
It must not be forgotten that two
existing situations could generate
an even greater impact of the
situation in China:
• A process is underway to increase
China’s export costs by raising
tariffs, since many nations
consider China’s low production
costs to represent “dumping”.
The nation’s high growth
during past years may be the
result of careless borrowing
and the creation of a credit
bubble.
• US President-elect Donald Trump
indicated throughout his campaign
that he will assume a protective
trade stance, and that trade
agreements will be reviewed
and in many cases canceled. The
Trans-Pacific Partnership
Agreement may be seriously
affected by this posture.
Of course no crystal ball will
predict China’s future, but the
indicators and marked tendencies
of 2016 point to an especially
difficult 2017 for the Asian giant.
ECONOMIC INSIGHTS OF MEXICO AND THE WORLD
11
International overview
Consequences of low oil prices
in Mexico and the world
The world’s economic instability during the past year has resulted primarily
from a combination of both political and social factors; however, other causes
have added to the situation as well.
Energy resources have affected
mankind through the centuries by
causing phenomena of economic
and technological transformation,
such as the use of coal during the
Industrial Revolution and the use of
oil since the late 20th century.
Period
Price
(USD/Barrel) WTI
2016
$42.420
2015
$48.802
Current market dynamics and the
processes of globalization
undergone by the world’s major
economies as well as developing
nations, have meant that variations
in both the supply and demand for
oil generate macroeconomic effects
for all.
2014
$92.845
2013
$98.022
2012
$94.175
2011
$95.047
During recent years, oil prices
have fallen drastically. According to
information from Mexico’s Ministry
of Economy, the reduction in oil
prices from 2014 to 2016 was
equal to 55% of the value attained in
the base year.
2010
$79.545
2009
$61.984
2008
$99.914
2007
$68.971
2006
$66.319
2005
$56.812
ECONOMIC INSIGHTS OF MEXICO AND THE WORLD
12
International overview
De igual forma, el fomento y las inversiones que empiezan a
realizar los países desarrollados principalmente en distintos
tipos de energías alternativas, no muestra evidencia de que
los precios tope de alrededor de 100 pesos por barril que se
tenían en 2013 y 2014 puedan ser nuevamente alcanzados.
The main reasons behind this
problem are:
• The excess of supply resulting
from OPEC’s refusal to reduce its
annual production.
• The presence of new competitors
such as the United States with
fracking (hydraulic fracturing
to extract oil and gas from the
subsoil), and Iran, which returned
to the market upon the lifting of
economic sanctions.
• The uncertainty that circles around
China and rumors of deceleration
which implied that the world’s
primary consumer of oil was
beginning to decrease its demand.
The consequences of such a
drastic reduction have been seen
in numerous nations and economic
sectors. The International Labor
Organization estimates that falling
prices have occurred because
approximately 11 million individuals
have lost their job.
On the other hand, countries like
Venezuela, where oil represents
76% of total exports, price
reductions have contributed to
serious economic problems; they
are actively seeking solutions
in a joint manner with other
OPEC members. Unfortunately,
agreements that could imply shortterm improvements have not been
reached.
Oil also plays a preponderant role
in Mexico. According to information
obtained from the nation’s census
office (INEGI), Mexico’s total oil
exports range from 6% to 9%, thus
exports have been notably affected.
The current trade deficit of
12.464 billion dollars is explained in
part by Mexico’s inability to replace
the income from oil sales, in spite of
strong growth in the manufacturing
sector.
During early October, OPEC
agreed to reduce daily production
in 2017 by one million barrels, from
ECONOMIC INSIGHTS OF MEXICO AND THE WORLD
33.4 million to 32 million barrels per
day. This measure is expected to
allow prices to reach approximately
a level of 50 to 60 dollars per barrel
in 2017.
In spite of the above, continued
volatility is expected in markets as
well as in currencies in nations that
have been affected by reduced oil
prices. Therefore, no accelerated
recovery in the short term is
predicted.
Although OPEC has started
to show a desire to correct the
situation, the dynamics of the past
two years do not provide investors
or markets with clarity or optimism.
Thus it would be an error to expect
notable progress from projects in
the oil sector.
Nor does investment in
alternative or clean energy, mainly in
industrialized nations, offer evidence
of a return to the top prices of
2013 and 2014, of approximately
100 dollars per barrel.
13
National overview
Social policy
As mentioned in the above sections, the international context has direct
implications on Mexico’s economic and social performance. Donald Trump’s
election as US president will be more impactful than movements like Brexit, yet
internal situations will also play an extremely important role in 2017.
In terms of the political setting,
events in 2017 will include
gubernatorial elections in the
states like the State of Mexico,
Coahuila, and Nayarit: three states
that currently are governed by the
PRI political party. The election in
Estado de México will undoubtedly
be the most important because of
the state’s size and relevance in
relation to the 2018 Presidential
election.
The main point of analysis in
these elections will be the voters’
reaction to a presidential term
marked by conflict, corruption, and
assumed widespread nonconformity
in the nation. Since these states
currently have PRI governors, if
another party wins the governor’s
office or if opposition parties
receive a higher percentage of
votes, the PRI will need to analyze
in depth whether the trend could be
repeated in the Presidential election
of 2018.
Specifically, in the state of
Estado de México, leading analysts
believe that the state will remain
under the control of the PRI. The
experiences of recent years,
however, could indicate that the
current governor, Eruviel Ávila
Villegas, may be a candidate for
president in 2017.
It is important to outstand that
the final year of government at
both the state and national levels
is marked by actions aimed at
securing the vote in the following
election. Increased public spending,
stable economic indicators, and
in some cases, specific positive
actions by candidates, have no goal
other than improving the image of
the individual or party.
The main point of analysis
in these elections will be
the voters’ reaction to a
presidential term marked
by conflict, corruption,
and assumed widespread
nonconformity in the nation.
The year before an election may
see large spending on infrastructure
and social programs, which can
offset any expected slowdown in the
economy due to external factors.
Such public spending should be
carried out with available resources
to the degree possible and not
through debt, especially in the event
of increased interest rates.
In late 2016, the surveys
seemed to indicate that Margarita
Zavala is the virtual candidate of
the PAN political party, which had
an advantage over the Morena
party with Andrés Manuel López
Obrador. However, this year has
proven to the world that surveys
14
National overview
may be very far from representing
reality (Brexit, Donald Trump, peace
in Colombia). As a PRI candidate
begins to emerge and the impact
of Donald Trump’s decisions is
measured during the early months
of his administration, events may tip
the scales in either direction.
The final aspect, in spite of
having repercussions in every part
of the nation, could be classified as
a primarily social situation: the high
levels of violence and insecurity
Mexico continues to experience.
According to the study made
by Mexico’s census bureau (INEGI)
in mid-2016, during the past four
years, 72.4% of the Mexican
population over age 18 has had
the perception of insecurity; this
percentage is three points higher
than during the previous presidential
term.
It is not surprising that 90.6%
of the population surveyed in the
state of Estado de México claims
feeling insecure; this state is where
perceptions of increasing problems
have been the highest. The state
of Yucatan, on the other hand,
is where the population feels the
safest, with a perception of 31.5%.
These statistics refer solely
to the classification of “common
crimes” unrelated to organized
crime or drug trafficking. Because
of the situation of violence in the
nation, the principal effects of such
groups have been felt in the states
of Guerrero, Michoacán, Veracruz,
and the state of Estado de México.
internal corruption remain high,
deficient federal and state policies
are in effect, and the country’s
northern neighbor is one of the
world’s largest consumers of drugs.
According to Mexico’s national
system of public safety (SNSP),
the month of August 2016, was
the most violent month to date
in President Enrique Peña Nieto’s
administration; the year as a whole
has shown increases in violence.
Situations like the above have
a direct impact on Mexico’s
image abroad, and variables such
as investment and tourism are
seriously affected.
Considering the importance of
next year in the electoral campaign
of 2018, the authorities should be
expected to make efforts to reduce
insecurity and violence, if only to
present a more desirable situation
for the average voter. Unfortunately,
the violence that began in Mexico
ten years ago under the so-called
“war against drugs”, will have no
solution as long as the levels of
15
National overview
Economic policy
The combination of internal and
external factors will force Mexico to
face new conditions and economic
restrictions:
• Credit restrictions as a
consequence of increased interest
rates.
• Lower levels of investment,
given the bad image generated
by violence and Donald Trump’s
election as president-elect of the
United States.
• Much lower possibilities of
creating new jobs, given sluggish
investment and economic
dynamics.
Mexico’s Ministry of Finance,
aware of the many factors that will
be present in 2017, decided in the
second half of 2016 to make
a budget cut. According to the
ministry’s criteria of economic
policy for 2017, the main economic
variables will perform as follows:
Since the indicators used to
generate the national budget for
2017 were taken into account
before Donald Trump’s victory, the
estimates will probably have to be
adjusted to a less positive setting:
• GDP estimates will drop to levels
between 1.6% and 2.0%.
• Increased pressure on prices will
take inflation to levels between
5% and 6%.
• The above will affect the interest
rate, which was between 6%
and 7%. As a result, available
income for individuals and for
servicing government debt will
be affected.
• Oil prices, on failing to recover
significantly, will generate
a sizeable deficit in foreign
accounts, which will continue
to exert pressure on the
exchange rate to the degree
that no substitutes exist for such
income.
• The average exchange rate for
2017 could be from 20.00 to
21.00 pesos per US dollar, with
a high degree of volatility.
• Fewer jobs will be created, and
the informal economy will be
favored.
• The flow of remittances from
abroad will be reduced from an
estimated 26.365 billion dollars
to 16 billion dollars in the event
of increased repatriations to
Mexico or the levying of a tax on
money transfers to Mexico.
16
National overview
Chart of perspectives and
general projections for economic
variables in 2017
In the absence of absolute certainty regarding the behavior of
economic variables in 2017, the above analysis serves as a
basis to make estimates for the primary economic indicators.
These variables are only estimates, based on available
information and the variables’ trends during the final months of
2016. Change could occur at any moment due to volatility in the
world’s economy.
Variable
Estimate*
Exchange Rate
$20-21 pesos per US dollar
Interest Rate
6.0% - 7.0%
Growth in GDP
1.6% - 2.0%
Oil Price
$51 - $55 USD/Barrel
Inflation
5.0% - 6.0%
Current Account
$18 - $20 billion USD
UnemploymentRate
4.0%
*Source: SHCP
17
National overview
Comments on Mexico’s
main productive sectors
External and internal factors will have direct repercussions on Mexico’s
economic performance in 2017. In an attempt to increase the understanding of
possible impacts, we present below a series of comments on the course that
Mexico’s main productive sectors may follow.
Manufacturing
and Maquila
During recent years, the
manufacturing sector has become a
primary driver of the economy. The
variations it has shown in 2016 are
expected to prevail in 2017.
Two factors may have a positive
impact on the sector.
In first place, the sizable
devaluation of the Mexican peso
during 2016 versus the world’s
primary currency, the US dollar,
has made Mexican manufacturing
cheaper for foreigners.
Nonetheless, exports have shown a
degree of deceleration in late 2016.
the devaluation of the Chinese
currency in 2016 and the possible
renegotiation of NAFTA, with
negative effects for the sector.
In particular, the automotive
sector has been benefited by
exchange rate variations around
the world. According to Forbes, the
Honda, Mazda, and Nissan brands
have stated that they will increase
their investment in Mexico due to
its proximity to the US. Since the
yen’s appreciation versus the US
dollar, producing in Japan is not as
profitable as it was in early 2016.
In a similar manner, if the United
States keeps its promise to place
trade restrictions on China, the
world will have to turn to new
producers: an essential opportunity
for growth in Mexico.
Both the maquila industry and
the manufacturing sector will have
important challenges in 2017:
18
National overview
Tourism
Financial
According to Moody’s, tourism
represents 8.5% of Mexico’s GDP
and is thus one of the nation’s main
sources of income. The same study
estimates that tourism will grow at
rates higher than GDP in 2017, just
as it did in 2016.
It is probably the financial sector
that shows the highest levels of
doubt and uncertainty. In 2016,
speculation showed that volatility
will continue to be a determining
trend in 2017.
Factors such as the peso’s
depreciation and regulations to
promote greater competition among
airlines are making Mexico an ever
more attractive destination for
both domestic and international
tourism. The challenge is centered
on Mexico’s image abroad; image
associations with violence and
insecurity prevents some travelers
from industrialized nations from
selecting Mexico as a tourist
destination.
On the other hand, Forbes stated
that growth in the automotive sector
is also having a positive effect on
tourism due to the large numbers
of individuals who are coming to
Mexico for business travel.
Situations like the US election,
agreements among oil-producing
nations to limit production, or the
resignation of the head of Mexico’s
central bank (Agustin Carstens effective as of July, 2017) were
factors that spurred important
increases or decreases in the
Mexican stock exchange (BMV).
Due to Mexico’s close
relationship with the United States,
Donald Trump’s decisions regarding
Mexico will point to the variations
that may occur in financial markets
next year.
In spite of the lack of clarity
with respect to financial markets in
Mexico, downward movements have
been less than initially estimated.
Current regulations as well as the
continued development of the
financial sector through the creation
of new instruments will permit
ongoing construction on a solid
foundation.
The dynamism of financial
regulations in Mexico and the
terms implemented by the nation’s
largest banks, have permitted a
56% increase in access to financial
services since 2012. An important
factor has been mobile banking,
with a positive trend in the sector.
On the other hand, estimates
of Mexico’s growth in 2017 have
been adjusted gradually downward,
as forecasts of the exchange rate,
inflation, and interest rate have
increased.
19
National overview
Challenges, risks,
and recommendations
Both the international and domestic scenarios present a series of events
that may translate into a year of important challenges and opportunities.
Specifically, the economic effects would seem to indicate a year of low growth
and dynamism. Thus the nation must be prepared ranging from the most basic
up to the most complex level, in order to face any possible outcomes in 2017.
The complexity of political relations
in this new international structure,
increasingly protectionism, will
have direct impacts on current
trade structures, on the ease of
moving from one nation to another,
and on the cultural and
technological exchanges that can
occur among nations.
National decisions and
economic dynamics in 2016, have
permitted the identification of five
macroeconomic situations that the
world will have to confront in 2017:
• Donald Trump as US president,
with a protectionist stance
• Implications and progress in the
Brexit process
• The importance and correct
handling of world migration
• Economic deceleration in China
• Variations in oil prices as a
consequence of excess supply
Each situation will have a distinct
impact on world economies; thus
appropriate preparation for possible
scenarios will be invaluable in 2017.
From a national perspective,
Mexico should take the following
measures:
Each situation will have a
distinct impact on world
economies; thus appropriate
preparation for possible
scenarios will be invaluable in
2017.
• To react proactively and rapidly
in spite of the appearance of the
negative effects of speculation.
The problems are well identified,
and the authorities must develop
specific plans to deal with various
scenarios.
• To consider renegotiating NAFTA
as a necessary element. If
carried out correctly, NAFTA
should make the region more
powerful, rather than destroying
it. Changes to meet the needs of
NAFTA members will have to be
accepted. It must not be forgotten
that NAFTA does not have the sole
objective of benefiting Mexico;
both the United States and
Canada will seek to improve the
conditions for interaction.
20
National overview
• To analyze, in a context of trade
protectionism, the tariffs that will
support improved performance of
the internal economy.
• To define specific actions to
motivate the internal market
and employment, such as an
agreement to strengthen the
consumption of Mexican products.
• To support new market sectors
as indispensable for economic
growth and the development of
specific sectors of society.
• To establish mechanisms that
generate trust in the authorities
and in political institutions before
the election of 2018.
• To create political agreements
to respect voting and conserve
national unity in the event of any
result.
• To reduce problems of insecurity
and violence in order to transform
Mexico’s image in the world and
promote business in the nation.
These objectives can be
achieved by providing a grand
national alliance formed with all
sectors of society, by defining
and complying
with clear goals over the medium
term.
• Attention to client needs becomes
a high priority.
Mexico’s economic, political, and
social conditions are essential inputs
in the making of business decisions.
Faced with such perspectives,
organizations face important
challenges and risks to mitigate in
the upcoming year. Information will
be vital for making timely business
decisions.
Within this scenario of
volatility and uncertainty, which
also generates effects of
various magnitudes for Mexico’s
corporations, the following
suggestions may be useful:
• In times of crisis, cash flow is
of the utmost importance. Thus,
building cash reserves must be a
priority.
Mexico has great strengths for
moving through muddy waters in a
global setting of uncertainty. Since
multiple opportunities will exist in
this process, attentiveness must
become a daily activity.
It is indispensable for Mexican
companies of all sizes to be aware
of the importance of macroeconomic
change for their performance.
Ignoring such situations or believing
they will not generate potential
problems must be replaced by
concrete action plans that will
permit minimizing the effect of
contingencies in 2017.
• Having trained, motivated talent is
an important condition for being
able to deal with these periods
of instability; eliminating qualified
personnel to reduce costs is not
always the best decision.
• Supervising costs and their
relation to prices is an element
that can prevent future problems.
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partnership. Services are delivered by the member firms. GTIL and its member firms are not agents of, and do not obligate, one another and are not
liable for one anothers acts or omissions.
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