MEXICO: An Introduction
Introduction
The Mexican economic and political landscape has been deeply impacted in the past 12 months by both domestic and global events, including trade decline between the US and China, volatility and fears of recession in the USA, supply-chain reconfiguration, the war in Ukraine, mounting inflation and energy prices.
High inflation has been mainly fuelled by global demand for Mexican exports, the growing cost of imports and increased spending on infrastructure and social programmes, and has caused the Central Bank of Mexico to increase interest rates to 11.25%. As a result, the Mexican peso is at its strongest since 2015, compounded by a growth in remittances, and resilient and increased foreign investment in the country, including nearshoring-related investment.
The Mexican economy has recovered to its pre-pandemic levels, with growth of 3.1% in 2022 but more moderate growth of 2.5% expected for 2023, due to tighter monetary policy and a fiscal policy focused on finalising certain large infrastructure projects and social programmes prior to the end of the current presidential administration’s term.
On the political front, the race for presidential elections in 2024 has commenced early with political parties PRI, PAN and PRD forming an alliance to oppose the current administration’s political party, Morena. Both the alliance and the incumbent party will determine their respective candidates in the following months and primary campaigns are underway.
Nearshoring
With supply and value chains returning to Mexico, the growth in the manufacturing sector is likely to be substantial in the coming years. Mexico has become a hub for nearshoring given its strategic geographical position. Countries such as China, Italy, Germany and South Korea, among others, are setting up in Mexico through the acquisition or construction of manufacturing facilities, which has also boosted the industrial real estate sector. China being the biggest player with 49% of newly arrived companies being Chinese. With nearshoring resulting in substantial investment in industrial real estate, the challenge will be to develop enhanced energy, water, waste management, transport and road infrastructure to cope with the demand.
Relevant Judicial Rulings
The Mexican Supreme Court of Justice has been presented with a number of cases relevant to economic development in the past year, and has declared the unconstitutionality of the following legal norms:
- an electoral reform proposed by the executive branch to limit the powers and budget of the National Electoral Institute (Instituto Nacional Electoral), including the elimination of 2,100 jobs at the institute, the centralisation of certain electoral matters and the modification of certain rules to organise and carry out elections at federal and local levels;
- pre-trial imprisonment (prisión preventiva oficiosa) as it relates to certain tax offences, as these offences shall not be considered organised crime and a risk to national security, among other considerations; and
- a presidential decree providing for the National Guard to be part of the Ministry of National Defence, as it should be a force of a civilian nature.
Infrastructure and Energy
Considering that it has now commenced the final year of its term, the current administration will likely attempt to complete its landmark infrastructure projects, including a transoceanic corridor comprising a railroad, pipeline and industrial facilities and parks that is being developed to cross Mexico, from the port of Coatzacoalcos in Veracruz to the port of Salina Cruz in Oaxaca, to attract cargo that today passes through the Panama Canal.
In addition to the recent government sponsored acquisition of 13 power generation plants from Spanish company Iberdrola, CFE is in the process of developing several combined cycle power plants across the country, solar plants in the north of Mexico and has entered into preliminary agreements for the expansion of gas pipelines and LNG terminals.
The Energy Regulatory Commission has started to ease the suspension on the granting of permits for different regulated activities, which began during the COVID-19 pandemic; however, the reactivation has been slow and it is not clear if there will be a revised energy policy that actively supports investment in the sector for utility-scale and isolated supply generation projects, particularly renewables, notwithstanding Mexico’s international and legal commitments to generate 35% of its energy from renewable sources by 2024.
Restructurings
During 2022 and 2023, we have continued to witness financial restructuring of non-bank financial institutions and companies in the pharmaceutical, steel and telecoms sectors. Although the collapse of major non-bank financial institution seems to have peaked, the outcome of the cases will be very relevant and may result in regulatory action. One of the most relevant work-outs was the case of Altán Redes, a company with a public-private partnership agreement for developing a country-wide shared telecommunications network that ended up being acquired by the Mexican government last year after an attempt at restructuring in an insolvency proceeding.
Amendments to Securities Market Legislation
A proposed amendment to the Securities Market Law has been approved by the Senate, which encompasses (i) a simplified procedure for the registration of securities to increase the participation of small and medium-sized companies in the public securities offering, (ii) more flexible clauses on protection against hostile takeovers, (iii) public policy incentives on sustainability and gender equity, and (iv) the incorporation of hedge funds regulation, among other things.
Environmental, Social, and Corporate Governance (ESG)
Mexican regulators continue to take significant steps in green and sustainable finance, aligning with international developments. Mexico has introduced its sustainable taxonomy, which identifies and defines activities, assets and investment projects with positive environmental and social impact. The International Financial Reporting Standards on Sustainability (ISSB1 and ISSB2) were published, setting the disclosure standards on climate and sustainability risk. These have been endorsed by the International Organisation of Securities Commissions (IOSCO) of which Mexico is a member. The Mexican Association of Retirement Fund Administrators (AMAFORE) also released the ESG Questionnaire for Issuers, aiming to incorporate ESG criteria into the investment decisions made by Mexican pension fund managers (AFORES). These actions reflect an ever growing emphasis on promoting sustainable practices in the financial sector.
Tax
There has been an increase in the number of tax audits with a deep review of all taxpayer’s transactions. Conclusive agreements with tax authorities, reached with the support of the Taxpayers’ Defence Office (PRODECON), have become an essential part of a defence before embarking on litigation. Compliance with formal requirements, such as tax notices informing the tax authorities of an M&A transaction or even the liquidation of an entity, has become more cumbersome to achieve, notwithstanding that lack of compliance can have costly fiscal results for taxpayers.
With respect to foreign residents, the requirements to designate a tax representative in Mexico have been increased and made difficult to comply with. The obligation for all taxpayers to identify their individual controlling beneficiary(es) has become extremely important, as failure to comply with this obligation may result in significant penalties.
Antitrust
The Mexican Antitrust Commission (COFECE) has been actively investigating cartels and abuse of dominance conduct across various sectors, including food, transport and logistics, financial services, construction, real estate, energy, health, public procurement, and digital markets. In a landmark achievement, 2022 witnessed COFECE imposing its highest fines to date, totalling approximately USD250 million. This robust enforcement sends a clear message that anti-competitive practices will not be tolerated, safeguarding fair competition. Excitingly, COFECE has reinforced its dedication to effective antitrust regulation with the appointment of a highly experienced Chairwoman to lead its Board of Commissioners; as a seasoned attorney in the antitrust field, her expertise promises to bolster the antitrust Mexican ecosystem, ensuring robust enforcement measures.