MEXICO: An Introduction to Mexico

Mexico: Corporate M&A Overview Guidelines  

Daniel Del Río, Amilcar García and Natalia Espinoza

Around the world countries are turning to extremes, populism and nationalism, and Mexico is not only caught in the crosshairs but is also no exception. Meanwhile, current domestic economic trends appear to be at a standstill, and we remain watching, albeit hopefully, from the edges of our seats.

According to the National Institute of Statistics and Geography (INEGI), in the first ninth months of 2019, the growth of the Mexican economy has stopped and has only created 488,000 formal jobs. This, among other things, is since some private international investors are waiting cautiously on their investments in Mexico to see how the new policies established by the new Mexican administration of Lopez Obrador, Mexico’s newly elected populist, left wing president will work in Mexico, provided that same have been considered so far as cloudy and without the expected impact.

In addition, the investment environment has been affected since there continues to be a significant security need, due to threat level from drug related violence in certain parts of the country. Likewise, the country’s economic potential is constrained by high levels of poverty, extensive informality, a fragile rule of law and corruption which at the end of the day shows an impact in the development of business in Mexico since investors may find difficult to hire skilled labor and face informal business that do not show compliance with the law which may lead to the need to offer services with lower margins.

Mexico’s economic stasis remains relevant in the international concert and many, including The World Economic Forum, point a finger to trade tensions stirred up by the denouncement of NAFTA and the delayed congressional action on its replacement, “The United States-Mexico-Canada Agreement (USMCA)” (despite agreement between Lopez Obrador and Trump). The current deadline for action on USMCA is December 20th, however some sources warn that if it is missed approval could be delayed until as late as 2021, leaving Mexico’s economy in state of uncertainty.

Notwithstanding the above, it is relevant to consider that Mexico has a diversified economy less dependent on commodities relative to other Latin America countries and according to Trading Economics, direct foreign investment in Mexico has increased by $7.33 million USD in the third quarter of 2019 and the growth is reflected in Mexico’s M&A market as well.

Global Legal Insights registered 212 deals in the M&A market in 2018 at a combined value of $8.64 billion USD. According to Transactional Track Record’s November Report, the amount of deals in 2019 related to auto parts, manufacture, food and beverages, pharmaceutical, renewable energy and the aerospace industry had then peaked at 242 with a combined value of $13.57 billion USD, and the amount of moved capital in the market had increased by 24% compared to the same period in 2018.

Despite this atmosphere of uncertainty there are many notable domestic efforts with the aim of growing Mexico’s economy including a new wave of ambitious infrastructure projects such as the construction of new fuel refineries in the south of the country, raising the minimum wage, a massive crack down on fuel theft, the construction of the new Santa Lucía International Airport and a new train said to boost tourism in the country’s southern regions. Many such initiatives appear ripe with potential to benefit the M&A market.

On November 26th, the Mexican government announced the first phase of an infrastructure plan to improve public facilities relating to transportation, tourism and telecommunications over the duration of the next five years. The plan is said to be underwritten primarily by the private sector at an estimated investment of $859 billion Mexican pesos ($44.3 billion USD) spread out across 147 projects. The investments pertaining to transportation alone, such as highways, ports and airports are expected to reach $284 billion Mexican pesos ($14.7 billion USD), one third of the target budget. This should substantially boost Mexico’s employment rate and economic growth.

Such plans come on heels of an increase of the minimum wage from $88.36 to $102.68 Mexican pesos. Though this increase is less than $1 USD, it reflects a promising step in the right direction.

The raise was accompanied by two significant and controversial pieces of new legislation that aim to boost the economy from other fronts. One front, which has already been implemented is known as The Austerity Law which aims to curb excessive government spending. The other follows in the footsteps of US States such as Colorado and Washington by arguing to legalize both medical and recreational marijuana use which could potentially open the flood gates for investors with a green thumb. Though The Austerity Law has been said to save the government up to $500 million Mexican pesos ($26.3 million USD) it has also markedly cut many middle class government worker’s salaries, which may prove to have other lasting negative effects on the economy. Meanwhile, action on the cannabis legislation has been pushed back until April 2020.

Fuel theft, in the recent past, has been an enormous detriment to Mexico’s economy, averaging at roughly 56,000 stolen barrels each day across the country in 2018, according to Pemex. Already the new administration has made significant advances to fight fuel theft by establishing a military presence around refineries, using tanker trucks to move large oil supplies and by targeting criminal groups engaged in fuel theft, resulting in a lowered average of 4,000 stolen barrels per day. This has not only stabilized oil prices but is expected to ease concerns regarding fuel security for investors that rely on it for the livelihood of their businesses.

One other development to watch closely is the creation of The Mayan Train, approximately 950 miles of tracks that would carry tourists throughout the Mayan heartland. This highly anticipated plan is also highly controversial as it may have detrimental effects on the environment and potentially displace thousands of indigenous people. Advocates of The Mayan Train argue that it would connect numerous remote and picturesque locations in the southern states of Mexico, open them up for development and create many jobs in the process.

Despite the cancellation of the Texcoco International Airport, the new upcoming controversial construction of Santa Lucía International Airport, located in north of Mexico City, is set to open by 2021, which is an infrastructure project meant to develop the Santa Lucía area as well as solving the problem of overcrowded terminals and delays in the Benito Juárez International Airport.

An additional symptom that may prove to have a positive effect on the M&A market in Mexico is that structural reforms enacted by past administrations in energy sector have continued to be in force and do not seem to be cancelled by the party in power.

The rise of extremism and an increased atmosphere of uncertainty may feel potent and even threatening at times, however Mexican businesses remain determined on the knife’s edge of growth. We are confident by new infrastructure projects, legislation and opportunities with great potential, for M&A developments and investments and expect that new policies of current administration provide clarity to investors.